KHC Kraft Heinz
Iconic brands in slow decline; healthy cash margins, but heavy debt caps the upside despite the break-up story.
The story
Kraft Heinz is a mature, over-leveraged packaged-food company. Its brands (Heinz, Philadelphia, Oscar Mayer, Kraft Mac & Cheese) still give it scale and shelf power, but volumes keep eroding as private label, GLP-1 drugs and health trends take share. It is in decline: the large reported losses come from goodwill impairments, while underlying cash margins are still healthy. Management is pursuing a break-up into two companies, which may unlock focus but will not fix the volume problem.
Revenue falls about 2-3% a year, in line with the 5-year CAGR, then settles into a slow perpetual decline. The operating margin fades slightly, from about 17.5% before impairments to 17%, because higher promotion and reinvestment spending are needed to defend volume. Sales-to-capital is set well above the 0.4 reported figure, which is inflated by acquisition goodwill, since a shrinking firm needs little new capital. The beta stays at the staples anchor, with a small failure probability for $18.6B of net debt.
Value drivers
| Revenue growth (Y1) | -2.5% |
| Terminal growth | -0.5% |
| Forecast horizon | 5y |
| Target operating margin | 17.0% |
| Years to target margin | 3 |
| Sales-to-capital | 1.50 |
| Beta | 0.70 |
| Failure probability | 3.0% |
| Cost of capital (WACC) | 7.7% |
| Terminal WACC | 8.5% |
Valuation bridge
| PV of explicit FCFF | 12.83B |
| PV of terminal value | 23.69B |
| Equity value | 17.26B |
| ÷ shares → per share | $14.55 |
News
bearish -0.20 · 8 articles
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Projected free cash flow to the firm
| Yr | Revenue | Growth | Margin | NOPAT | Reinvest | FCFF | PV |
|---|---|---|---|---|---|---|---|
| 1 | 24.28B | -2.5% | 17.3% | 3.32B | 0 | 3.32B | 3.08B |
| 2 | 23.79B | -2.0% | 17.2% | 3.22B | 0 | 3.22B | 2.78B |
| 3 | 23.44B | -1.5% | 17.0% | 3.15B | 0 | 3.15B | 2.52B |
| 4 | 23.20B | -1.0% | 17.0% | 3.12B | 0 | 3.12B | 2.31B |
| 5 | 23.08B | -0.5% | 17.0% | 3.10B | 0 | 3.10B | 2.14B |
Key risks
- Volume erosion speeds up because of GLP-1 drugs and private label
- Further goodwill and brand impairments, plus pressure from the debt load on its rating
- The break-up's costs and execution go wrong, with dis-synergies
Catalysts
- Completing the two-company separation, which could close the conglomerate discount
- Pricing and marketing reinvestment stabilizes organic volume