Why this iconic American stock is full of beans

Loved in UK homes and recovered from the Covid crash, it is a favourite of our overseas investing expert.

Rodney Hobson is an experienced financial writer and commentator who has held senior editorial positions on publications and websites in the UK and Asia, including Business News Editor on The Times and Editor of Shares magazine. He speaks at investment shows, including the London Investor Show, and on cruise ships. His investment books include Shares Made Simple, the best-selling beginner's guide to the stock market. He is qualified as a representative under the Financial Services Act.

Hats off to Miguel Patricio, who took over as chief executive officer of food and beverage giant The Kraft Heinz (NASDAQ:KHC) less than a year ago. Not only has he halted a long slide in the share price, he has seen the stock bounce back fully from the Covid-19 slump. 

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Once a company starts on the slippery slope it is hard to find a lifeline to cling to. And this company had been struggling since rival food groups H J Heinz and Kraft Food Group merged in 2015 to create the fifth-largest food and beverages company in the world and the third-largest in North America. 

Source: interactive investor. Past performance is not a guide to future performance.

Products are sold in nearly 200 countries and a distribution network in Europe and emerging markets accounts for about a fifth of total sales. Yet its global range of grocery products including condiments and sauces, cheese and dairy, meals, meat and beverages has lost sales to rivals offering healthier options or cheaper alternatives.

It is all summed up in the self-defeating TV advertisements for Heinz tomato ketchup. The stuff is of such high quality that it is too thick to slide out of the bottle. So people buy runny stuff you can actually get onto your plate.

The big challenge for Patricio is to end a cycle of falling sales, prompting cuts to advertising budgets, leading to more falls in sales. The previous regime tried price reductions that affected profits and job cuts that hurt morale.

Results for 2019 were admittedly disappointing, with a 4.9% fall in net sales for the full year and 5.1% for the fourth quarter. However, 2020 has started on a more promising note thanks to stockpiling by shoppers as the coronavirus epidemic started to bite.

Sales in the first three months of the year were ahead of expectations at nearly $6.2 billion, with comparable sales up 6.2%.

Gains came not only in terms of higher volumes but also through stronger sales of more expensive items. This rate of sales growth is likely to be repeated in the second quarter.

On the downside, the higher sales are still not translating into higher profits. The scramble to meet demand pushed up costs, so profits fell from $405 million in the first quarter of last year to $378 million this time.

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Patricio’s early moves have been focused on making the supply chain, from procurement through manufacturing to distribution, more efficient. He wants a tighter grip on costs within the chain.

Marketing spend will be concentrated more on lines with wider profit margins. Greater emphasis is being placed on online sales.

The policy of slashing prices has been reversed, with prices up an average of about 1.6% in the latest quarter. 

Greater attention now needs to be allocated to disposing of less popular lines in order to reduce the heavy debt pile of just under $30 billion, and allow greater resources to be put behind the most promising products. Patricio is quite rightly avoiding any rush towards a clearout at distressed prices.

Meanwhile, Kraft Heinz is taking its first small steps towards improving its green image by scrapping its plastic-wrapped multipacks, apparently prompted by Tesco (LSE:TSCO).

More than 100 million Heinz products are sold by this method through the UK supermarket. Heinz is now looking at similar initiatives with other retailers in a move that could reduce an unnecessary cost.

The struggles of the company have been reflected in the share price, which peaked at $96.65 in February 2017 before beginning a long slide. Better times for shareholder could be on their way.

Source: interactive investor. Past performance is not a guide to future performance

Hobson’s choice: Last July, with the shares just above $30, I advised buying up to $32. Since then they have been as low as $20 in mid-March, but they are almost back to $30, where they offer a yield of 5.4% despite a one-third reduction in the dividend. The recommendation stands. 

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.