With an average analyst rating of hold, Kraft Heinz is clearly not a favorite. But some of the best stock picks are contrarian in nature. With most analysts more focused on growth than on value, a mediocre analyst rating does not necessarily mean a stock is a bad investment. So what do we know about KHC's valuation?
Let's start our value analysis with the price to book (P/B) ratio. This is perhaps the most basic measure of a company's valuation, which is its market value divided by its book value. Book value refers to the sum of all of the company's tangible assets minus its liabilities -- you can also think of it as the company's equity value.
Traditionally, value investors would look for companies with a ratio of less than 1 (meaning that the market value was smaller than the company's book value), but such opportunities are very rare these days. So we tend to look for company's whose valuations are less than their sector and market average. The P/B ratio for Kraft Heinz is 0.8, compared to its sector average of 3.3 and the S&P500's average P/B of 4.74.
The most common metric for valuing a company is its Price to Earnings (P/E) ratio. It's simply today's stock price of 32.8 divided by either its trailing or forward earnings, which for Kraft Heinz are $2.26 and $3.07 respectively. Based on these values, the company's trailing P/E ratio is 14.5 and its forward P/E ratio is 10.7. By way of comparison, the average P/E ratio of the Consumer Staples sector is 23.09 and the average P/E ratio of the S&P 500 is 29.3.
Indebted or mismanaged companies can't sustain shareholder value for long, even if they have strong earnings. For this reason, considering Kraft Heinz's ability to meet its debt obligations is an important aspect of its valuation. By adding up its current assets, then subtracting its inventory and prepaid expenses, and then dividing the whole by its current liabilities, we obtain the company's Quick Ratio of 0.48. Since KHC's is lower than 1, it does not have the liquidity necessary to meet its current liabilities.
One last metric to check out is Kraft Heinz's free cash flow of $2.96 Billion. This represents the total sum of all the company's inflows and outflows of capital, including the costs of servicing its debt. It's the final bottom line of the company, which it can use to re-invest or to pay its investors a dividend. With such healthy cash flows, investors can expect Kraft Heinz to keep paying its 5.0% dividend.
Shares of Kraft Heinz appear to be fairly valued or undervalued at today's prices -- despite the negative outlook from analysts. Sometimes stocks are cheap for a reason, so remember that just because a stock is fairly valued does not necessarily mean it will go up. So be sure to do your own due diligence if you are interested in taking a long position in KHC.
