Like a growing number of food and beverage stocks, Kraft Heinz shares (KHC) are at multi-year lows. However, while I’ve previously taken a contrarian bullish view on a few such companies, including Diageo (DEO) and Hershey (HSY), I don’t see enough reasons to be optimistic for a rebound in KHC’s market price.
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I hold some KHC shares in my portfolio, primarily for dividend income and its defensive qualities. If I held KHC in a taxable account where options trading was permitted, I’d likely consider a covered call strategy, so I ultimately rate KHC as a Hold.
Browsing through KHC’s option chain via TipRanks indicates that call options are outperforming as bullish sentiment holds sway in KHC stock.
KHC Background Sets the Stage for Resilience
The Kraft-Heinz Company was formed by merging its namesake brands, Kraft and Heinz, in 2015. The company also operates under various other brands, including Oscar Mayer, Philadelphia, Kool-Aid, and Jell-O. Combined, their brands make Kraft Heinz the largest packaged food company in North America based on revenues and market cap.
Kraft Heinz produces its products more so internationally than in North America. However, 75% of its revenues are derived from North America in U.S. dollar terms as the company also imports products from other countries into the U.S. The fact that the company combined its Canadian and U.S. operations into a single business unit in 2022 may be problematic in case of future trade tariffs between the two countries.
Not typically associated with healthy eating, processed and packaged foods that Kraft Heinz and peer companies make have been out of favor in recent years as consumers become more health-conscious and choice-driven. Many of these companies have experienced flat or declining revenue despite inflationary pressures. The industry has also been widely criticized for what’s known as “shrinkflation” — the concept of using smaller product sizing while keeping prices constant.
From a shareholders’ perspective, sluggish growth and concerns about profitability and debt levels have pushed KHC stock 4% lower year-to-date. KHC’s historical price chart looks rather underwhelming, showing a trend of lower highs and lower lows since 2022.
Kraft Heinz Financials Assert Confidence
Once Q4 2024 is in the books, Kraft Heinz shareholders might be looking at the company’s lowest top-line revenue in more than 5 years. On average, Wall Street analysts expect Q4 sales to fall about -2.5% from the same quarter in 2023, which could result in a full-year revenue print below $26 billion. Focusing on supply chain and productivity has helped to keep gross margins above 65%, with commentary from senior management indicating optimism.
Normalized EPS has still been inching up for KHC, but this could be too little too late unless the company can kickstart revenue growth. Moreover, despite successful margin management, Kraft Heinz seems likely to face trade aggravations and debt cost pressures from another bout of rising interest rates. Also, a strong U.S. dollar strains KHC’s international income despite the company hedging its currency exposures.
The company is expected to post non-GAAP EPS a penny above $3.00 for 2024, almost exactly in line with 2023. Analysts expect a modest increase for 2025 but are pricing in more significant increases beginning in 2026.
On a non-GAAP basis, KHC stock’s P/E is a touch under 10x, which would likely be attractive to value investors.
Political Risk Puts Kraft Heinz Share Price in Danger
Kraft Heinz seems likely to face some incremental challenges in 2025. Potential import tariffs are top-of-mind for investors in various sectors, and KHC is likely to face some exposure here. Additionally, should tariffs be applied on Canadian goods, another bout of national pride could lead Canadians to snub big American consumer brands like Heinz and Kraft.
Investors should be reminded of the harsh consequences Heinz experienced a decade ago for closing its production facilities in Canada. At that time, many consumers north of the border opted to shift to locally-produced French’s ketchup, and the loss of business resulted in Heinz moving some production back to Canada. If the Trump Administration takes a protectionist stance against Canada, Mexico, and other countries, big U.S. consumer brands could face a backlash from patriotic citizens.
The appointment of democrat-turned-republican Robert F. Kennedy Jr. to lead U.S. Health and Human Services could serve as yet another burden for KHC shareholders as Mr. Kennedy seems destined to take a hard line on ingredients used in processed foods. While widespread ingredient bans are unlikely, more rigorous labeling requirements could push consumers away from unhealthy packaged food products.
If that’s not enough to worry about, Kraft Heinz shareholders can’t forget the company’s sizeable long-term debt balance. That debt is nearly $20 billion, against only ~$6.4 billion in EBITDA over the past four quarters. While that ratio isn’t out of step with peers like General Mills (GIS), Campbell’s Soup (CPB), and Kellanova (K), it’s another burden amidst questionable growth prospects and rising interest rates.
Is Kraft Heinz a Buy, Sell, or Hold?
According to Wall Street analysts, KHC stock is rated as a Hold. Four of the 15 Wall Street analysts monitoring KHC have issued Buy ratings, 10 have issued Hold ratings, and one has issued a Sell rating. The average KHC stock price target is $34.80, implying a potential upside of about 18% from current prices.
While KHC stock currently carries a circa 10x P/E, there’s very little positive sentiment for the business as shareholders are forced to navigate a minefield of potential risks in 2025. The stock pays a 40-cent quarterly dividend, representing a current yield of about 5.5%. Importantly, KHC hasn’t made significant acquisitions or investments in recent years, meaning its free cash flow can support ongoing dividends. The $1.60 annual dividend rate has been flat for several years, and I wouldn’t anticipate any near-term increase.
I’m not expecting any meaningful upside in KHC shares this year despite Wall Street’s average price target of ~$35. As a result, investors comfortable with options could attempt to boost their yield on KHC to ~8.25% by selling the July 2025 $32.50 call against a KHC stock holding. It’s important to remember that a covered call strategy limits upside potential but not downside risk.
