Should You Invest in Kraft Heinz (KHC) in 2016?

We issued an updated research report on The Kraft Heinz Company KHC is on May 26, 2016.

On May 5, Kraft Heinz reported better-than-expected first-quarter 2016 results.

The packaged food company beat the Zacks Consensus Estimate for both earnings and sales in first-quarter 2016. Adjusted earnings per share of $0.73 surged 37.7% year over year on improved sales trends and cost savings. Organic sales inched up 1.1%, reversing a decline of 3.1% in the previous quarter, on improved volume/mix. Volume/mix rose 0.8% in the quarter, while it declined 3.8% in the previous quarter. Volumes mix improved in all the segments – Europe, the U.S., Canada and Rest of the World.

However, consumption trends remained weak in the quarter. Kraft Heinz, like many other U.S. food producers, has struggled due to the shift in consumer preference toward natural and organic ingredients over packaged and processed food.

Kraft Heinz’s categories have slowed due to soft global retail and consumer demand. Consumption trends in a number of the company’s key categories like ready-to-drink beverages, frozen meals and salad dressings remain challenged.

Category trends and market share performance is likely to remain under pressure in 2016.

Though the company’s sales have been relatively soft, cost savings have led to better margins, mainly in the developed markets of the U.S. and Europe.

This Zacks Rank #3 (Hold) company has implemented many cost-saving initiatives including the integration of Kraft Foods and Heinz. The company plans to save $1.5 billion in annual costs by the end of 2017, primarily through work-force reductions, factory closures and consolidations. In the first quarter of 2016, the company generated about $225 million in cost savings.

Other productivity improvement initiatives include programs such as zero-based budgeting; modernization and capability building within the manufacturing footprint and building a performance driven culture in the company.

A portion of its savings is also being re-invested in the business for innovation, brand building and marketing to stimulate top-line growth.

With growing consumer demand for organic and more nutritional food, Kraft Heinz launched organic Capri-Sun juices and Mac & Cheese dinner (under its Cracker Barrel brand) without artificial ingredients in 2016. It also renovated Kool-Aid Jammers product with fewer calories and no preservatives and added a new line of Classico Riserva branded premium pasta sauces made with no artificial ingredients or added sugar. Further, frozen meals with enhanced nutrition is in the pipeline for launch this year.

Moreover, in 2016, the company will continue to focus on shifting advertising spend from non-working (like production costs, advertising agency costs) to working media (digital, print advertisements) and eliminate inefficient trade promotion spending. In fact, management has plans in place to boost overall marketing spending in markets like the U.S. and Europe in 2016.

These product innovation efforts and improved marketing spend can lead to better sales trends, going forward.

Stocks to Consider

Some better-ranked food stocks are B&G Foods Inc. BGS, Post Holdings, Inc. POST and Lancaster Colony Corp. LANC. All three stocks hold a Zacks Rank #1 (Strong Buy).

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KRAFT HEINZ CO (KHC): Free Stock Analysis Report
 
B&G FOODS CL-A (BGS): Free Stock Analysis Report
 
POST HOLDINGS (POST): Free Stock Analysis Report
 
LANCASTER COLON (LANC): Free Stock Analysis Report
 
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