Consumer Shifts And Regulatory Costs Will Disrupt Processed Food Sales

Key Takeaways

• Shifting consumer trends and rising health regulations threaten the relevance and profitability of Kraft Heinz's heavily processed product portfolio.
  
• Fierce competition from private labels and e-commerce brands, combined with supply chain obstacles, continue to strain market share and earnings potential.
  
• Expanding emerging market presence, targeted innovation, disciplined pricing, and increased marketing are driving improved sales growth, margin expansion, and long-term earnings stability.

Catalysts

Manufactures and markets food and beverage products in North America and internationally.

• Kraft Heinz faces a persistent shift in consumer preferences toward fresh and healthier food options over processed and packaged goods, which could lead to prolonged declines in core product relevance, stagnating or eroding long-term revenue.
  
• The increasing prevalence of private labels and direct-to-consumer brands fueled by e-commerce growth is likely to intensify competition and erode Kraft Heinz's market share and pricing power, pressuring both sales growth and net margins over time.
  
• Regulatory risks, including higher taxes and stricter rules targeting unhealthy ingredients such as sugar and salt, are expected to increase compliance costs and compress net margins, particularly as much of Kraft Heinz's portfolio remains in processed categories.
  
• The company's efforts at brand innovation and premiumization have lagged sector peers, and ongoing challenges in repositioning aging brands suggest continued difficulty in driving meaningful long-term top-line growth and expanding margins.
  
• Volatile input costs, increasing tariffs and relentless supply chain complexities threaten gross margins, while a consolidating retail environment limits Kraft Heinz's ability to offset these pressures through pricing, ultimately constraining earnings growth.

Kraft Heinz Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Kraft Heinz compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Kraft Heinz's revenue will decrease by 0.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 10.4% today to 13.0% in 3 years time.
• The bearish analysts expect earnings to reach $3.3 billion (and earnings per share of $2.83) by about July 2028, up from $2.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 10.7x on those 2028 earnings, down from 12.7x today. This future PE is lower than the current PE for the US Food industry at 19.6x.
• Analysts expect the number of shares outstanding to decline by 2.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.4%, as per the Simply Wall St company report.

Kraft Heinz Future Earnings Per Share Growth

Risks

• Strong top line growth and margin expansion in emerging markets, along with confidence in hitting double-digit long-term revenue growth, could accelerate overall company sales and operating income in future years.
  
• Substantial increases in marketing spend, targeted product renovation, and expansion of the Brand Growth System to more brands are driving improved performance in core categories, which is likely to lift both top line growth and net profit margins over time.
  
• Rapid growth in the Heinz brand and innovation within international markets, including new product launches like Heinz Mayo and successful cross-geographic expansion of existing products, provide robust long-term revenue streams and support earnings stability.
  
• Effective mitigation of inflationary pressures through disciplined pricing actions, procurement initiatives, and selective price increases demonstrates management's ability to protect and rebuild margins and earnings even in a volatile cost environment.
  
• A renewed focus on product innovation, with innovation as a percent of sales increasing from 1.6 percent to 3 percent, combined with a pipeline of successful launches and renovations, positions Kraft Heinz to regain relevance and drive secular top line growth and higher profitability.

Valuation

• The assumed bearish price target for Kraft Heinz is $26.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Kraft Heinz's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $51.0, and the most bearish reporting a price target of just $26.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $25.1 billion, earnings will come to $3.3 billion, and it would be trading on a PE ratio of 10.7x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of $28.49, the bearish analyst price target of $26.0 is 9.6% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.