Kraft Heinz Shares Reach Their Lowest Point Since 2020, Raising Questions About Purchase Opportunities
Kraft Heinz: A Tumbleweed in a Market of Daisies
If you've noticed Kraft Heinz (KHC, down 0.14%) casually meandering amongst the flourishing stocks, you're not alone. This consumer powerhouse houses a diverse portfolio of well-known labels like Kraft, Heinz, Oscar Mayer, Jell-O, and Lunchables. But, like the tumbleweed, it's been struggling to keep pace in a market filled with daisy-like growth.
Last year, the stock took a nosedive, losing 17%. And the last time you could find Kraft Heinz at these price levels? During the market turbulence in 2020.
So, has the tables turned, making Kraft Heinz a deal too good to pass up, or is there more to the story tied around its hooves?
The Tale of Stagnant Growth
The sticking point for Kraft Heinz, these days, is its lackluster growth. With a focus on less-than-wholesome options and catering to an older demographic, the business finds itself in the crosshairs of a generation increasingly grappling with health concerns.
In fact, demand for Lunchables took a hit so significant that the company had no choice but to remove the product from U.S. schools. And let's face it—averaging single-digit growth over the past five years isn't exactly music to the ears of hungry investors.
But all is not lost in the world of Kraft Heinz. The company still remains profit-driven. Over the past 12 months, it's managed to rake in a 20% operating margin on sales.
The Conundrum of Value and Underwhelm
At first glance, Kraft Heinz seems like a captivating value stock with its newly-minted 52-week low. However, trading on a forward price-to-earnings multiple of 9 may be misleading just as much as it appears to be alluring.
Analysts have a tendency to be optimistic. If their expectations take a nosedive for Kraft Heinz, the multiple could see a rapid climb higher.
And with convincing-looking low forward earnings multiples, impatient investors could be attracted by what they perceive as a bargain—despite its underwhelming financial numbers and mediocre growth prospects. But in this case, what seems like a bargain could be an elaborate trap known as a "value trap."
Weighing the Risks
Valuation can't be the only driver for buying a stock. On paper, Kraft Heinz looks incredibly affordable. But remember, those numbers are based on earnings predictions that can change.
If the company doesn't land on its feet soon and improve its growth rate, those future earnings projections for Kraft Heinz may take a steep nose dive, making this value stock look a lot more expensive than it appears.
Another enticing factor for some investors may be the scrumptious dividend return. At a mouthwatering 5.6%, the payout is certainly appealing. But, like the allure of a juicy steak, it could just be a smokescreen masking a hidden risk.
The dividend serves as a luscious carrot especially tempting to income-centric investors, but should the company's financial health deteriorate in the future, that payout may be less than secure.
The Verdict: Patience is a Virtue
Without a growth catalyst to convince us that Kraft Heinz is setting sail on a better trajectory, it's best to hit the pause button. While a rosy picture of Kraft Heinz recovering may be enticing, investing in the face of uncertainty is like putting all your eggs in birdseed. You never know when something unexpected is going to take flight.
Despite Kraft Heinz's focus on less-than-wholesome options and an aging consumer base, causing challenges in a health-conscious market, the company still maintains a strong profit-making ability, with a 20% operating margin on sales over the past year.
Investors may be drawn to Kraft Heinz due to its appealing low forward price-to-earnings multiple, but if the company fails to improve its growth rate, future earnings projections could rise, making the value stock appear more expensive than expected.
