Author Topic: KHC - Kraft Heinz Co.  (Read 32638 times)

Contra123

  • Newbie
  • *
  • Posts: 25
Re: KHC - Kraft Heinz Co.
« Reply #80 on: August 09, 2018, 03:49:36 PM »
Ignore 3G, Buffett or any part of the ‘story’ for a minute, and look at the financial statements in isolation, and you might feel different. These are great operators, there is no denying it, but I am not yet aware of any operator who has managed to conquer the cycle. The cycle gets everyone in the end.
Disclaimer: Regular guy. My takes are reliably bad & I am the ultimate contrarian indicator.


Contra123

  • Newbie
  • *
  • Posts: 25
Re: KHC - Kraft Heinz Co.
« Reply #81 on: August 09, 2018, 03:54:48 PM »
The consumer brand model (for food companies) has been hurting for many years. The big challenge is distribution. In the past, the large multinational companies largely  controlled the distribution channel. This gave them enormous pricing power and this drove profitability.

This is no longer the case. Distribution power has changed in two important ways:
1.) retailers (Walmart, Costco, Krogers etc) have much more power today and as a result have been growing their own store brands at the expense of national brands; this trend is long term.
2.) the internet (Amazon prime) is allowing consumers more choice. You go to a retail store you have to buy one of the few brands they sell (their own brand or one or two national brands). Online you can pretty much buy whatever you want. It is also easier for small companies to sell online, bypass the retailer and make a go of it by targeting a niche.

Kraft/Heinz may do ok by buying perennial underachievers like Kraft and Campbells and cutting costs to the bone (firing their managment teams and cutting back on R&D and marketing). This works when you are small or just getting started. Having access to cheap money also helps. Does it work when you are a massive size? And when debt is getting more expensive?

Perhaps another opportunity is to get large enough that you can wrestle control back from the retailers. I do not see it happening.

Bottom line is this sector is ugly. Hard to see how things get much better. Lots of downside risks and not many upside opportunities. Not a great formula for a long term investment.

I concur, but there is a stage and price for everything. The price here ($70B mcap, $30B net debt, $3ish B LTM FCF) is wrong, IMO. The stage of the cycle is also wrong (again, just my 2c). If this was a considerably smaller company (where a greater fool could overpay for a takeout, rather than vice versa), at an earlier stage of a rollup, and cheaper to boot, that would be... something. It is what it is.
Disclaimer: Regular guy. My takes are reliably bad & I am the ultimate contrarian indicator.

RadMan24

  • Sr. Member
  • ****
  • Posts: 289
Re: KHC - Kraft Heinz Co.
« Reply #82 on: August 09, 2018, 06:30:55 PM »
There are some strategic problems with KHC and its moat:

1) The number of competing brands - private label from discounters etc - is increasing, thus giving multiple alternatives to Heinz
2) A big challenge for a big brand company like Heinz is to sustain its brand power and value through generations. A man aged 50 today is probably more inclined to use Heinz like always, while his son has grown up with Heinz, brand B, brand C not to mention all the cheap private label products at discounters or the like

These factors puts a pressure on price and erodes some of the moat, i.e. others are stealing some of the profits which drives down ROIC

1.In an inflationary cost environment, KHC can hold prices better than private label, and close the "value gap"
2. Heinz has grown 5% annually since 2015

petec

  • Hero Member
  • *****
  • Posts: 1492
Re: KHC - Kraft Heinz Co.
« Reply #83 on: August 10, 2018, 10:06:14 AM »
I was a bit upset about 3Gs recent sale.   3G was supposed to be long term investors. Selling is not a good sign.

https://www.cnbc.com/2018/08/08/kraft-heinz-shares-fall-after-3g-capital-trims-stake.html

As discussed above that article might be misleadingly phrased. Bloomberg reported it as a sale by unaffiliated co-investors, not 3G.

petec

  • Hero Member
  • *****
  • Posts: 1492
Re: KHC - Kraft Heinz Co.
« Reply #84 on: August 10, 2018, 10:14:59 AM »
Lots of good points raised here. Certainly this sector is more challenged than it was by private label (although trends there very much depend on the category) and by the internet making distribution and marketing easier for smaller brands.

But,
a) these companies are in the early stages of learning to respond to this threat. There is no particular reason why they must fail.
b) same goes for trends towards healthy foods.
c) there is still huge long term growth to go for in the developing world.

I see no real reason why these companies can't grow volumes 1% a year while keeping up with inflation via price increases and efficiency gains and converting 90% of earnings to FCF. At 15x that means you're getting a 7% real return for a very long time, and in Kraft's case you also have best in class management which means deal optionality is on your side.

Not the most compelling thing in the market by a long shot but I have a corner of my portfolio for boring inflation-linked cash streams like this.

Viking

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 1304
Re: KHC - Kraft Heinz Co.
« Reply #85 on: August 10, 2018, 10:29:53 AM »
Lots of good points raised here. Certainly this sector is more challenged than it was by private label (although trends there very much depend on the category) and by the internet making distribution and marketing easier for smaller brands.

But,
a) these companies are in the early stages of learning to respond to this threat. There is no particular reason why they must fail.
b) same goes for trends towards healthy foods.
c) there is still huge long term growth to go for in the developing world.

I see no real reason why these companies can't grow volumes 1% a year while keeping up with inflation via price increases and efficiency gains and converting 90% of earnings to FCF. At 15x that means you're getting a 7% real return for a very long time, and in Kraft's case you also have best in class management which means deal optionality is on your side.

Not the most compelling thing in the market by a long shot but I have a corner of my portfolio for boring inflation-linked cash streams like this.

Petec, i think the moat for the national brands companies have been growth starved for 10-15 years (as the retailers pusher their own brands). Costco is a great example. Here in Canada every year they are launching more Kirkland Signature brands. Normally it replaces a national brand (or in rare cases competes with it as a dual listing); once this happens that volume is gone from the national brand. Competition is fierce and my guess is national brands will struggle to grow their total volume (even 1%) moving forward. Their opportunity is to cut costs to the bone; however, this gets more difficult over time and often leads to falling sales (unless the managment team is stellar). Here in Canada when Heinz bought Kraft they gassed the whole Kraft managment team. Costs came down; not sure what happened to Kraft sale s over a couple of years. Would make a great case study :-)

Contra123

  • Newbie
  • *
  • Posts: 25
Re: KHC - Kraft Heinz Co.
« Reply #86 on: August 10, 2018, 11:10:21 AM »
Lots of good points raised here. Certainly this sector is more challenged than it was by private label (although trends there very much depend on the category) and by the internet making distribution and marketing easier for smaller brands.

But,
a) these companies are in the early stages of learning to respond to this threat. There is no particular reason why they must fail.
b) same goes for trends towards healthy foods.
c) there is still huge long term growth to go for in the developing world.

I see no real reason why these companies can't grow volumes 1% a year while keeping up with inflation via price increases and efficiency gains and converting 90% of earnings to FCF. At 15x that means you're getting a 7% real return for a very long time, and in Kraft's case you also have best in class management which means deal optionality is on your side.

Not the most compelling thing in the market by a long shot but I have a corner of my portfolio for boring inflation-linked cash streams like this.

Petec,

What numbers get you to 15x FCF?
Disclaimer: Regular guy. My takes are reliably bad & I am the ultimate contrarian indicator.

petec

  • Hero Member
  • *****
  • Posts: 1492
Re: KHC - Kraft Heinz Co.
« Reply #87 on: August 10, 2018, 11:13:09 AM »
To be clear my 1% volume assumption includes EM. And with private label you need to be careful which category. Private label seems to have stalled out in several of them IIRC.

petec

  • Hero Member
  • *****
  • Posts: 1492
Re: KHC - Kraft Heinz Co.
« Reply #88 on: August 10, 2018, 11:16:21 AM »
Lots of good points raised here. Certainly this sector is more challenged than it was by private label (although trends there very much depend on the category) and by the internet making distribution and marketing easier for smaller brands.

But,
a) these companies are in the early stages of learning to respond to this threat. There is no particular reason why they must fail.
b) same goes for trends towards healthy foods.
c) there is still huge long term growth to go for in the developing world.

I see no real reason why these companies can't grow volumes 1% a year while keeping up with inflation via price increases and efficiency gains and converting 90% of earnings to FCF. At 15x that means you're getting a 7% real return for a very long time, and in Kraft's case you also have best in class management which means deal optionality is on your side.

Not the most compelling thing in the market by a long shot but I have a corner of my portfolio for boring inflation-linked cash streams like this.

Petec,

What numbers get you to 15x FCF?

15x earnings and in the long run I’d expect 90% of earnings to turn into free cash. More if they can’t grow volumes.

EDIT: I suppose what I’m saying is working capital shouldn’t consume cash forever so recent FCF might not be a good valuation metric.

Incidentally I view 3G as superb business builders. Their record in Brazil suggests that. The characterisation of them as being people who only know how to cut costs may be a big misunderstanding. Their system revolves around incentivising people really well. That both cuts costs but also improves execution.
« Last Edit: August 10, 2018, 01:04:31 PM by petec »

vince

  • Full Member
  • ***
  • Posts: 180
Re: KHC - Kraft Heinz Co.
« Reply #89 on: August 11, 2018, 10:30:19 AM »
The consumer brand model (for food companies) has been hurting for many years. The big challenge is distribution. In the past, the large multinational companies largely  controlled the distribution channel. This gave them enormous pricing power and this drove profitability.

This is no longer the case. Distribution power has changed in two important ways:
1.) retailers (Walmart, Costco, Krogers etc) have much more power today and as a result have been growing their own store brands at the expense of national brands; this trend is long term.
2.) the internet (Amazon prime) is allowing consumers more choice. You go to a retail store you have to buy one of the few brands they sell (their own brand or one or two national brands). Online you can pretty much buy whatever you want. It is also easier for small companies to sell online, bypass the retailer and make a go of it by targeting a niche.

Kraft/Heinz may do ok by buying perennial underachievers like Kraft and Campbells and cutting costs to the bone (firing their managment teams and cutting back on R&D and marketing). This works when you are small or just getting started. Having access to cheap money also helps. Does it work when you are a massive size? And when debt is getting more expensive?

Perhaps another opportunity is to get large enough that you can wrestle control back from the retailers. I do not see it happening.

Bottom line is this sector is ugly. Hard to see how things get much better. Lots of downside risks and not many upside opportunities. Not a great formula for a long term investment.

great post viking but I believe they increase marketing when cost savings are realized