Kraft Heinz does not have the profile of a defensive investment based on the requirements of Ben Graham. The Packaged Foods firm may nonetheless be of interest to more risk-oriented investors who have a solid thesis on the company's future growth. At Market Inference, we remain agnostic as to such further developments, and prefer to use a company's past track record as the bellwether for future potential gains.
Kraft Heinz Trades at Fair Multiples
The “Graham number” is an equation that enables us to quickly determine how a stock is valued in terms of its earnings and assets:
√(22.5 * 6 year average earnings per share (0.86) * 6 year average book value per share (40.565) = $41.22
At today's price of $32.52 per share, Kraft Heinz is now trading -21.1% below price that Graham would recommend paying for the stock.
Some people use the Graham number alone, but it is best to consider it together with the other requirements for defensive stocks that Graham listed in Chapter 14 of The Intelligent Investor.
Negative Retained Earnings In 2018, 2019, And 2020, An Acceptable Record Of Dividends, and Eps Growth In Excess Of Graham'S Requirements
Ben Graham wrote that an investment in a company with a record of positive retained earnings could contribute significantly to the margin of safety. However, Kraft Heinz had negative retained earnings in 2018, 2019, and 2020 with an average of $-327875000.0 over this period.
Another one of Graham's requirements is for a 30% or more cumulative growth rate of the company's earnings per share over the last ten 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.
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.
Negative Current Asset to Liabilities Balance and Not Enough Current Assets to Cover Current Liabilities
Graham sought companies with extremely low debt levels compared to their assets. For one, he expected their current ratio to be over 2 and their long term debt to net current asset ratio to be near, or ideally under, under 1. Kraft Heinz fails on both counts with a current ratio of 0.9 and a debt to net current asset ratio of -0.6.
According to Graham's analysis, Kraft Heinz is likely a company of average quality, which does not offer a significant enough margin of safety for a risk averse investor.
|Net Income (MM)||$10,941||-$10,192||$1,935||$356||$1,012||$2,363|
|Net Interest Expense (MM)||-$1,234||-$1,284||-$1,361||-$1,394||-$2,047||-$921|
|Depreciation & Amort. (MM)||-$1,031||-$983||-$994||-$969||-$910||-$933|
|Earnings Per Share||$8.91||-$8.36||$1.58||$0.29||$0.82||$1.91|
|Diluted Shares (MM)||1,228||1,219||1,224||1,228||1,236||1,236|
|Free Cash Flow (MM)||$1,695||$3,400||$4,320||$5,525||$6,269||$3,385|
|Capital Expenditures (MM)||-$1,194||-$826||-$768||-$596||-$905||-$916|
|Net Current Assets (MM)||-$46,815||-$42,608||-$41,604||-$38,765||-$34,948||-$33,746|
|Long Term Debt (MM)||$28,308||$30,770||$28,216||$28,070||$21,061||$19,233|
|Net Debt / EBITDA||4.19||4.47||4.52||3.83||3.06||3.47|