Over the last six months, Kraft Heinz shares have sunk to $22.24, producing a disappointing 14.6% loss - worse than the S&P 500’s 4.8% drop. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy Kraft Heinz, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Kraft Heinz Will Underperform?
Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons you should be careful with KHC and a stock we'd rather own.
1. Demand Slipping as Sales Volumes Decline
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful staples business as there’s a ceiling to what consumers will pay for everyday goods; they can always trade down to non-branded products if the branded versions are too expensive.
Kraft Heinz’s average quarterly sales volumes have shrunk by 3.8% over the last two years. This decrease isn’t ideal because the quantity demanded for consumer staples products is typically stable. 
2. Revenue Projections Show Stormy Skies Ahead
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Kraft Heinz’s revenue to drop by 2%, close to This projection is underwhelming and indicates its newer products will not accelerate its top-line performance yet.
3. Shrinking Operating Margin
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Looking at the trend in its profitability, Kraft Heinz’s operating margin decreased by 25.2 percentage points over the last year. Kraft Heinz’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was negative 18.7%.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Kraft Heinz, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 10.9× forward P/E (or $22.24 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are more exciting stocks to buy at the moment. We’d recommend looking at a dominant Aerospace business that has perfected its M&A strategy.
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