A major transformation in consumer sentiment regarding food and beverages has continued to gain traction, spanning across a plethora of demographics. In an age of exploring different tastes and preferences, more and more of the population at-large has transitioned from opaque, traditional packaged brands of food to organic, all-natural and more transparent goods. Such a drastic change has mainly been a product of a more health-conscience population on the macro level of society.
In other words, individuals now place a greater amount of importance on the specific ingredients within the foods and beverages being consumed on a daily basis. This has resulted in both the exponential rise in value of numerous young companies whose business models target this exact health-conscious sect of the market and the simultaneous fall of many conventional, old-school players in the packaged foods market. One notable giant who has continued to suffer from its most disastrous year as a company is The Kraft-Heinz Company. Not only does Kraft-Heinz carry a currently out-of-favor business model, but the company’s struggles have highlighted other major concerns linked to excessive debt, dishonest accounting practices and problems with the current management team.
Even though the U.S. equity market on aggregate has endured a strong year in terms of price appreciation, with the S&P (Stock and Performance) 500 Index rising 19.36 percent on a Year-To-Date (YTD) basis, Kraft-Heinz (NYSE: KHC) has been left in the dust. KHC, a component of the S&P 500 Index, has fallen 34.62 percent YTD. Furthermore, the stock has fallen 51.12 percent over the past one year. Such a steep decline in market price has placed the spotlight on the food and beverage company at the most inconvenient time. In April 2019, it was announced that Bernardo Hees, the then CEO of Kraft-Heinz, would be leaving the company.
However, this departure has been the least of Kraft-Heinz’s worries over the past fiscal year. Just two months earlier in February 2019, the company revealed to the public the receipt of a subpoena sent by the Securities and Exchange Commission (SEC) regarding suspicious accounting practices relating to financial statements. In addition, Kraft-Heinz also announced the scaling back of its dividend payment by 36 percent. A dividend payment is a specific percentage of net income that is distributed to shareholders of a company throughout the fiscal year.
Since a steady dividend payment is typically associated with a consistent stream of positive cash flows, the massive reduction in Kraft-Heinz’s yield stressed a warning sign to investors that capital reserves were dwindling at a faster rate than originally anticipated. To make matters even worse, Kraft-Heinz initiated 15.4 billion dollar write-down of assets related to Kraft and Oscar Mayer. A write-down is a reduction in the estimated value of a particular asset on the balance sheet.
At the time of the write-down in February 2019, KHC possessed a market capitalization of about 40.2 billion dollars, making the magnitude of the reduction enormous. As the internal problems continue to mount at Kraft-Heinz, prominent institutional investors are beginning to cash out. The most recent transaction came courtesy of 3G Capital Partners, a Brazilian-American investment firm, who revealed a sale of 25.1 million shares of KHC in its most recent regulatory filing with the SEC.
This sale follows a separate 20.1 million-share unloading in August 2018, also by 3G Capital. The recent wave of large-volume selling of KHC has raised the question as to whether or not Kraft-Heinz’s largest investor, Berkshire Hathaway (the multinational conglomerate company headed by Warren Buffett) is on the brink of selling shares. After the stream of bad news was made public in February, Mr. Buffett told CNBC that Berkshire Hathaway had “overpaid” when structuring the merger of Kraft and Heinz in 2015, with the help of 3G Capital. Being the well-respected and savvy investor he is, news of Warren Buffett pulling the plug would wreak havoc throughout the corporate ladder at Kraft-Heinz. If Berkshire Hathaway were to begin liquidating its investment in the food and beverage behemoth, an ugly domino effect would ensue, adding to the already-cratering stock price of Kraft- Heinz.
Some investors would make the case that KHC is oversold and ripe for buying. However, I am not convinced this claim is currently justified. While it is true that a barrage of selling has been taking place in the markets, such heavy volume is a result of poor business practices and unsatisfactory performance
Not only has the company struggled to maintain shelf space at large grocers and retailers across the country, but the drastic change in consumer sentiment outlined earlier has massively reduced profit margins, thus lowering bottom-line totals.
Finally, it was announced in August 2019 that Kraft-Heinz’s credit rating, a measure of its ability to pay back debt, is in danger of falling to ‘junk’ status, or ‘non-investment grade.’ Such a poor rating corresponds with a high level of risk relating the chance of Kraft-Heinz defaulting on capital borrowed from outside creditors. All in all, the future outlook for Kraft-Heinz as a business looks bleak. Financials at the company are expected to remain weak and carry over into 2020. After reviewing the company’s numerous internal and external problems, the bottoming-out of KHC does not yet seem to be in place, thus warranting future potential drops in equity prices.