Kraft Heinz is currently trading at $38.67 per share and has a Graham number of $32.07, which implies that it is 20.6% above its fair value. We calculate the Graham number as follows:
√(22.5 * 5 year average earnings per share * book value per share) = √(22.5 * 1.15 * 39.737) = 32.07
The Graham number is one of seven factors that Graham enumerates in Chapter 14 of The Intelligent Investor for determining whether a stock offers a margin of safety. Rather than use the Graham number by itself, its best to consider it alongside the following fundamental metrics:
Sales Revenue Should Be No Less Than $500 million
For Kraft Heinz, average sales revenue over the last 4 years has been $25,922,250,000, so in the context of the Graham analysis the stock has impressive sales revenue. Originally the threshold was $100 million, but since the book was published in the 1970s it's necessary to adjust the figure for inflation.
Current Assets Should Be at Least Twice Current Liabilities
We calculate Kraft Heinz's current ratio by dividing its total current assets of $7,897,000,000 by its total current liabilities of $9,028,000,000. Current assets refer to company assets that can be transferred into cash within one year, such as accounts receivable, inventory, and liquid financial instruments. Current liabilities, on the other hand, refer to those that will come due within one year. Kraft Heinz’s current liabilities are actually greater than its current assets, since its current ratio is only 0.9.
The Company’s Long-term Debt Should Not Exceed its Net Current Assets
This means that its ratio of debt to net current assets should be 1 or less. Since Kraft Heinz’s debt ratio is -0.6, the company has negative current asset / liability balance. We calculate Kraft Heinz’s debt to net current assets ratio by dividing its total long term of debt of $19,233,000,000 by its current assets minus total liabilities of $41,643,000,000.
The Stock Should Have a Positive Level of Retained Earnings Over Several Years
Kraft Heinz had negative retained earnings in 2018, 2019, and 2020 with an average of $-339,625,000. Retained earnings are the sum of the current and previous reporting periods' net asset amounts, minus all dividend payments. It's a similar metric to free cash flow, with the difference that retained earnings are accounted for on an accrual basis.
There Should Be a Record of Uninterrupted Dividend Payments Over the Last 20 Years
Kraft Heinz has offered a regular dividend since at least 2016. The company has returned an average dividend yield of 4.9% over the last five years.
A Minimum Increase of at Least One-third in Earnings per Share (EPS) Over the Past 10 Years
There are only 9 years of EPS data available on Kraft Heinz, which is short of the required 10, but it's still worthwhile to consider its EPS trend over the available period. First, we will average out its EPS for 2014 and 2015 which were $-0.04 and $-0.27 respectively. This gives us an average of $-0.16 for the period of 2014 to 2015. Next, we compare this value with the average EPS reported in 2021 and 2022, which were $0.82 and $1.91, for an average of $1.36. Now we see that Kraft Heinz's EPS growth was 950.0% during this period, which satisfies Ben Graham's requirement for growth.
Although it has EPS growth in excess of Graham's requirements, Kraft Heinz does not have the profile of a defensive stock because in addition to trading far above its fair value, it has:
- a worrying current ratio
- negative current asset / liability balance
- negative retained earnings in 2018, 2019, and 2020
