Higher Costs And Tariffs Will Redefine US Food Prospects

Key Takeaways

• Increased investments in marketing and R&D could strain margins without immediate revenue uplift, negatively impacting net earnings.
  
• Tariffs and rising base inflation may pressure gross margins, potentially leading to reduced revenue predictability and earnings stability.
  
• Strategic investments in marketing, R&D, and innovation could enhance brand value, drive profitable growth, and boost revenues and net income.

Catalysts

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

• Kraft Heinz plans to increase investments in marketing, research and development, and technology, which may result in higher costs without immediate revenue increase, potentially affecting net margins negatively.
  
• The company anticipates a 150 to 200 basis point impact on cost of goods sold due to tariffs, along with a rise in base inflation to 5 percent, which implies further pressure on gross margins and could impact net earnings adversely.
  
• Despite increased marketing spend, the return on investment remains uncertain due to the dynamic consumer environment, potentially leading to lower than expected revenue growth.
  
• Kraft Heinz's restructuring and product renovation efforts lead to further increased costs, specifically in cost of goods sold, without assured gains in market share, which might compress earnings.
  
• The company's wider operating income guidance range reflects potential volatility and uncertainty in policy changes, contributing to market concerns about revenue predictability and earnings stability.

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 0.6% 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 12.9x today. This future PE is lower than the current PE for the US Food industry at 19.2x.
• 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

• Kraft Heinz is making significant investments in marketing, R&D, and technology to improve their brand superiority and consumer value, which could lead to an increase in revenue and net margins.
  
• The company is scaling its brand growth system to a larger portion of its business, which has previously demonstrated positive results, particularly for Philadelphia and Heinz U.K., potentially leading to improved earnings.
  
• Emerging markets have shown accelerating growth, with expectations for this trend to continue, which could lead to stronger revenue and EBIT growth in these regions.
  
• Kraft Heinz is strategically investing in renovations and innovations across products such as cream cheese and Lunchables, which might result in increased volume and higher net income.
  
• The ability to strategically pass through some costs and selective promotional activities aligns with their strategy to drive profitable growth, potentially stabilizing gross margins and contributing positively to their net income.

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 $53.34, 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 $25.0 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 $28.94, the bearish analyst price target of $26.0 is 11.3% 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.