US Retail Headwinds Will Spur Measured Recovery Opportunities

Key Takeaways

• Limited gross margin and revenue growth, combined with increased tax rates, could negatively impact Kraft Heinz's net earnings and financial performance.
  
• Underperformance of key U.S. brands and promotional challenges may hinder revenue growth despite focus on selective brand recovery and product enhancements.
  
• Kraft Heinz anticipates improved profitability and revenue growth by boosting cash flow, strategic investments, and cost management while enhancing shareholder returns.

Catalysts

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

• Kraft Heinz anticipates limited gross margin expansion, ranging from flat to only 20 basis points in 2025, down from a 100 basis point increase in 2024. This indicates a more modest outlook for margin improvement, potentially impacting earnings.
  
• The company's strategy to invest in certain areas such as price, product, and marketing while maintaining flat pricing in 2025 suggests limited revenue growth, particularly if these investments do not yield significant volume improvements.
  
• The projected increase in the tax rate starting 2025 by 500 basis points could negatively affect net profit margins, despite efforts to mitigate the cash impact; this may lead to lower net earnings.
  
• Key brands in U.S. Retail are experiencing underperformance relative to their categories, focusing only on select brands for recovery may not be sufficient, which might hinder overall revenue growth.
  
• Continued mention of challenges such as promotional effectiveness and the need for ongoing product enhancements signal potential headwinds to achieving expected top-line growth, potentially affecting overall financial performance.

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 1.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 10.6% today to 13.5% in 3 years time.
• The bearish analysts expect earnings to reach $3.3 billion (and earnings per share of $2.92) by about April 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 11.0x on those 2028 earnings, down from 13.1x today. This future PE is lower than the current PE for the US Food industry at 17.4x.
• Analysts expect the number of shares outstanding to decline by 1.59% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Kraft Heinz Future Earnings Per Share Growth

Risks

• Kraft Heinz is focused on boosting free cash flow and returned $2.7 billion to stockholders through share buybacks and dividends, which may improve investor sentiment and support the share price.
  
• The company is seeing key successes that are not yet reflected in the financials and expects an improving top line throughout 2025, suggesting potential revenue growth in the future.
  
• Plans to achieve margin expansion and invest in price, product, and marketing are in place, which may contribute to maintaining or improving profit margins.
  
• Kraft Heinz has successfully leveraged its Brand Growth System in pilots, demonstrating potential for positively impacting earnings and revenue with innovation and strategic investments.
  
• Effective cost management is anticipated, with efficiencies expected to outpace inflation, suggesting positive impacts on profitability and net margins.

Valuation

• The assumed bearish price target for Kraft Heinz is $27.0, 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 $56.91, and the most bearish reporting a price target of just $27.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $24.7 billion, earnings will come to $3.3 billion, and it would be trading on a PE ratio of 11.0x, assuming you use a discount rate of 6.2%.
• Given the current share price of $30.1, the bearish analyst price target of $27.0 is 11.5% 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.