Marketing And R&D Investments Will Renew Lunchables And Capri Sun

Key Takeaways

• Strategic investments in marketing and innovations are anticipated to enhance brand visibility, increase consumer engagement, and drive sustained revenue growth.
  
• Scaling the brand growth system is expected to improve brand superiority and support long-term earnings through expanded market presence.
  
• Increasing investments in marketing and R&D may initially strain net margins before yielding growth, amid rising inflation and competitive pressures on revenue and earnings.

Catalysts

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

• Kraft Heinz is investing in marketing, R&D, and technology, aiming to optimize the return on marketing investments, enhance product offerings, and improve operational efficiencies. These efforts are expected to increase revenue through better consumer engagement and reduce costs, positively impacting net margins and earnings.
  
• The company is implementing a brand growth system, scaling it from 10% to 40% of its business by the end of the year. This system focuses on driving brand superiority, which is anticipated to support sustained revenue growth and improved earnings.
  
• Kraft Heinz plans to increase its marketing investment to 5% of revenue, which is expected to enhance brand visibility and consumer loyalty, likely leading to higher revenue growth.
  
• The company is pursuing product renovations and innovations, such as improved offerings in Lunchables and Capri Sun. These efforts are expected to drive future revenue growth by attracting more consumers and enhancing product appeal.
  
• Kraft Heinz's focus on expanding its presence in emerging markets and revitalizing key categories is expected to deliver revenue growth, particularly as these initiatives gain traction and scale.

Kraft Heinz Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Kraft Heinz's revenue will decrease by 0.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.4% today to 14.0% in 3 years time.
• Analysts expect earnings to reach $3.6 billion (and earnings per share of $3.14) 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 analysts price target, the company would need to trade at a PE ratio of 12.1x on those 2028 earnings, down from 13.0x today. This future PE is lower than the current PE for the US Food industry at 17.5x.
• Analysts expect the number of shares outstanding to decline by 1.67% 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

• The magnitude of the recent guidance cut is more significant than previous ones, raising concerns about whether current investment strategies will differentiate enough to improve performance, which could pressure future earnings.
  
• Kraft Heinz is increasing its investments in marketing and R&D, yet these increases have yet to show in financial results, potentially straining short-term net margins before the investments can yield revenue growth.
  
• There is an anticipated step-up in COGS inflation due to tariffs and commodity price increases, particularly in coffee and meat, which could put pressure on net margins.
  
• For the second quarter, gross margin is expected to face pressure from promotional activity step-up, hedge losses, and commodity peak inflation, which could negatively impact operating income.
  
• Kraft Heinz plans to continue promotional activities, but with the disciplined targeting of returns, there is a risk of not capturing enough market share growth, pressuring revenue in a competitive market.

Valuation

• The analysts have a consensus price target of $32.52 for Kraft Heinz based on their expectations of its future earnings growth, profit margins and other risk factors. 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 analyst's consensus, you'd need to believe that by 2028, revenues will be $26.0 billion, earnings will come to $3.6 billion, and it would be trading on a PE ratio of 12.1x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $28.87, the analyst price target of $32.52 is 11.2% higher.
  
• 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.