Kraft Heinz Stock (KHC) Near Five Year Lows Into Earnings – What Next?

The Kraft Heinz Company (NASDAQ: KHC) prepares to release its third-quarter earnings this morning, looking for a shift in momentum after a difficult start to the year. The KHC stock, currently trading at $25.45 in pre-market, is exhibiting signs of weakness, prompting analysts to question the company’s near-term prospects.

Kraft Heinz's stock has shed 17.06% YTD, and 26.67% in the past year as markets desert the name, leaving KHC close to five year lows leading in to the print.

Analysts are anticipating earnings per share (EPS) of $0.58 for the quarter ending September, a significant 22.7% decrease compared to the same quarter last year. The earnings call will provide critical insights into how Kraft Heinz is managing these challenges and its strategy for future growth. Markets will be paying close attention to management's commentary on the spin-off, cost-cutting measures, and efforts to adapt to changing consumer preferences.

Recent analyst actions reflect the growing unease. Mizuho analyst John Baumgartner, while maintaining a ‘Neutral' rating, lowered the price target from $31.00 to $29.00 in May. More recently, in October, both Morgan Stanley and Jefferies Financial Group further reduced their price targets, with Jefferies setting a target of $24.00 while reiterating a ‘Hold' rating. This downward revision of price targets signals a lack of confidence in KHC's ability to deliver significant near-term growth.

Adding to the uncertainty is the company’s strategic restructuring announcement on September 2nd. The plan to separate into two independent, publicly traded companies, intended to “accelerate profitable growth and unlock shareholder value,” initially backfired. The announcement triggered a 6.7% drop in the stock price as markets worried about potential disruptions and estimated dis-synergies of up to $300 million.

Kraft Heinz is also grappling with broader market challenges. Inflationary pressures, supply chain disruptions, and a shift in preference toward high-growth sectors like technology have all contributed to the stock's recent struggles. This confluence of factors resulted in a 3.84% decline in the stock over three consecutive trading days in early October.

However, a contrarian perspective suggests that the market may be overly pessimistic about Kraft Heinz. The company possesses a portfolio of iconic brands that still hold significant consumer recognition and loyalty. While changing consumer preferences are a challenge, Kraft Heinz has the resources to invest in innovation and adapt its product offerings. The spin-off, while initially met with skepticism, could ultimately unlock significant value by allowing each independent entity to focus on its core strengths and pursue targeted growth strategies.

The company's long-term success hinges on its ability to navigate these challenges and capitalize on its strengths. As analysts brace for the Q3 earnings report, the focus will be on whether Kraft Heinz can deliver a credible plan to restore market confidence and reignite growth. The current underperformance could be a prelude to a turnaround, or it could be a sign of deeper structural problems. The earnings report will provide crucial clarity.