Kraft Heinz (NASDAQ: KHC) has been a perennial underpeformer since the 2015 merger that created the company. Excessive cost-cutting, a lack of investments, and overvalued brands have all weighed on the stock over the last five years. But this year at least a few things are going right for the company.

Like other packaged food staples, Kraft Heinz has gotten a nice bump from the coronavirus pandemic. Organic sales have surged 7.4% in the second quarter as consumers have spent more time at home and restaurants have remained closed, meaning more food spending has been taking place at grocery stores.

Kraft Heinz has outperformed the market this year, gaining 8% so far, and it should see steady growth as the pandemic continues. But is it a buy? Let's take a closer look at what the stock has to offer today.

A boy eating mac and cheese

Image source: Getty Images.

The current status

With staples like mac and cheese and ketchup, Kraft Heinz is well-positioned for a crisis in which people spend more time at home and seek out comfort foods. In addition to the 7.4% increase in organic sales in the second quarter, the company saw Adjusted EBITDA increase 12.4% to $1.8 billion, and adjusted earnings per share improved from $0.78 to $0.80.

However, a familiar bugaboo snuck up on Kraft Heinz in the quarter as the company recorded goodwill and intangible asset impairment charges of about $2.9 billion, which followed a $15 billion impairment charge early last year and several others since then. The charges were for business units around the world, and for the Oscar Mayer, Maxwell House, and other brands.

Despite its strength in certain areas, Kraft Heinz is also a collection of faded, legacy brands like Jell-O and Kool Aid, which haven't received adequate investments and marketing spending recently. That's made the company vulnerable to ongoing asset impairments, showing the company is effectively worth less than it thinks it is. Though these asset impairments don't have any cash effect on the business, they are a sign that it has been poorly managed and overvalued, and those impairments also make a balance sheet carrying $28 billion in debt and less than $18 billion in tangible assets look more precarious.

Management did not give specific guidance on the earnings call, but it explained that a number of headwinds, including higher employee bonuses and the loss of a McCafe contract in Canada, would reduce its EBITDA margin by nine percentage points in the second half of the year, up from an earlier forecast of seven percentage points. However, it expected organic sales and EBITDA growth to continue, though the sales growth may be more muted than when the U.S. emerged from lockdowns earlier in the spring.

The fundamentals

Backed by Warren Buffett's Berkshire Hathaway and Brazilian investing firm 3G Capital, Kraft Heinz has the profile of a classic value stock. The company is a defensive, dividend-paying consumer staples stock with well-known brands and a distribution network that gives it an advantage over start-ups and other challengers.

However, like most legacy food brands, Kraft Heinz is also face challenges as consumers demand local and organic foods and have generally moved away from packaged, processed foods, posing a long-term threat. 

The stock trades at a modest P/E ratio of 12.4 based on its past four quarters, but analysts expect earnings per share to decline in the second half of the year -- due to some of the factors above -- and in 2021 as well, as the company is likely to face difficult comparisons to the pandemic period.

It currently offers a dividend yield of 4.6%, which is well-funded since the company cut its then-unsustainable dividend by 36% last year.

The verdict

While Kraft Heinz shares are cheap according to conventional standards and the company offers a solid dividend yield, there are still a number of risks facing the company, including the prospect of future impairment charges and restructuring costs as the company tries to overcome its recent missteps. Its debt burden and weak balance sheet are also preventing the company from making acquisitions that could give it younger, fast-growing brands that could compensate for some stodgier names, including brands the company couldn't even sell.

For investors looking for a defensive, consumer staples stock, there are better options available, including stocks like WalmartPepsi, and Hormel. Prospective investors should look out for the company's Investor Day conference in September, but for now the stock is too risky and troubled to be a buy.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



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