Kraft Heinz had already seen the value of their shares drop by half over the past two years. Thursday’s earnings call poured gasoline on this fire, and things are really ablaze now.
Kraft and Heinz used to be two separate American food companies that did battle with one another for almost 100 years. In 2012, Kraft ended up splitting the company into two components, Kraft Foods, which took the grocery side of the business, and Mondelez International, handling the snack portion, which was supposed to help their struggling grocery business.
Three years later, Kraft Foods ended up merging with Heinz, in a move backed by Warren Buffett, in July 2015, to add some new synergy. The new company hit the market at about $77 a share, and two years ago, had reached an all-time high of $96.65 a share, riding the coattails of a nice bull market overall. So far, so good.
2018 will not go down as all that great of a year for stocks in general, and perhaps without a strong market bringing in a lot of new money to stocks in general, we got to see how this company fared without this behind them. The result was far from pretty, and this ugliness may be getting even worse.
By the time the year was winding down, in late December, Kraft Heinz shares had fallen to an all-time low of 43.57, losing half of its value in less than two years. The market has been climbing since then though, and the company did gain a little of this back since Christmastime, closing at $48.18 on Thursday.
Then there was the earnings announcement that came out after the bell, and bells continued to ring after the announcement, the kind that sailors hear to warn of an impending storm and to get to their stations quickly.
In the aftermath of this announcement, shares of Kraft Heinz have dropped like a rock in after-hours trading, losing almost $10 a share and poised to shatter their all-time lows of 2 months ago. This represents an instant decline of 20%, and is set to erase $12 billion off the stock’s market capitalization as of closing Thursday.
Earnings Calls Can Really Move Markets Sometimes
Anyone who doesn’t think that earnings reports matter that much don’t really have to look around that much to see evidence to the contrary, but it’s when we see a report that disappoints as much as Kraft Heinz’s did to really see the power that these announcements can have.
Sometimes we see good results with a less than stellar near-term forecast, and we can see stock prices sink even though the actual earnings number may be a pleasant surprise. Less than expected results can also be modified with an optimistic outlook, and observers look at both the actual and the expected to base their decisions on what to do from here.
When you get terrible results and a terrible near-term outlook together, like we just saw from Kraft Heinz, it is time to really batten down the hatches as the ship will be taking on some real water. Seeing a stock drop by 20% in a matter of a couple of hours is certainly a lot of water.
This earnings call was bad enough that it will be hard for people to find much in terms of redeeming qualities in it, for 2019 at least. There is usually some good mixed in with the bad, which can lead us to wonder whether we are overreacting to the bad and not taking the good into account enough, but when it’s all bad news, there just isn’t anything to hang on to as the ship lurches further into the depths.
Actual earnings came in at 84 cents a share compared to analysts’ expectation of 94 cents. That’s a pretty big miss, over 10%, and in itself would be enough to cause a pretty big haircut in the price of the company’s stock, perhaps a similar drop to the amount that was below expectations.
The revenue miss was not that pronounced though, with the company posting revenue of $6.89 billion instead of the $6.94 billion that was expected. However, when we add in a $15 billion adjustment made to reflect the declining value of some of its core businesses, things really get ugly. With this amount accounted for, the company posted a quarterly loss of $12.61 billion, which works out to $10.34 a share.
Sometimes businesses have their numbers adjusted to more one-off situations, and this is why we use adjustments, to get a picture of how things would have been if not for this stuff, but adjustments based upon deteriorating business conditions are not the sort that we can just turn our heads from and pretend that they did not happen. This in itself is bad news and the adjustment itself is to be feared as much or perhaps even more than the earnings results.
A Poor Outlook for 2019 Adds to the Grimness
If things were set to turn around, with company officials telling us to be patient and to expect that a brighter day will dawn soon, then this can serve to take at least some of the edge off of these terrible numbers, but when the outlook remains poor, this just adds fuel to the fire.
Kraft Heinz isn’t telling us that things will be better in 2019, and quite the contrary, they are considering the current year a write-off and have focused their attention on 2020 and beyond. While this may at least tell us that the tunnel does have an ending, that’s a long way off.
The predictions for 2019 are for an EBITDA, or earnings before interest, taxes, depreciation, and amortization, of $6.3 to $6.5 billion, down from the $7.08 billion they earned in 2018, a year that was already so unkind to the stock. Estimates were in the range of $7.5 billion, so these numbers are very disappointing indeed.
Company Chief Financial Officer David Knopf shared with us that “while we expect to take a step back in 2019, we remain confident in delivering consistent profit growth in 2020 onwards, driven by fully leveraging our advantage brands, cost structures, and capabilities.”
That sure beats a message such as we have no idea when this will turn around and we’re not particularly optimistic about 2020 either, but investors will want to see this optimism be reflected on balance sheets, or at least have the projected better times closer at hand, to get too excited about such a prediction.
Kraft Heinz is also set to sell off some of its businesses to better manage its debt, and also has the ongoing SEC investigation into their activities on the burner. Knopf addressed these concerns by telling us that there was a misrepresentation involved, but it “was not material to our current or prior year statements,” and “we did implement several improvements to internal controls and took remedial measures to mitigate the likelihood that this happens again.”
While investors wait patiently until at least 2020 for the situation to turn around more at Kraft Heinz, they may be in for a pretty rocky ride along the way, starting with right now.