Shares of Kraft Heinz (KHC) plunged on Friday morning after Wall Street largely abandoned the stock following its Q4 results and dividend cut. The consumer packaged foods maker also revealed a probe by the SEC over the accounting practices in its procurement division.
EARNINGS: Kraft Heinz on Thursday reported adjusted earnings per share for its fourth quarter of 84c on revenue of $6.89B, falling short of the 94c analysts expected for EPS and the $6.94B they expected for revenue. The company said it recorded non-cash impairment charges of $15.4B to lower the carrying amount of goodwill in certain reporting units, primarily U.S. Refrigerated and Canada Retail, and certain intangible assets, primarily the Kraft and Oscar Mayer trademarks. The company said these charges resulted in a net loss attributable to common shareholders of $12.6B and diluted loss per share of $10.34. Kraft Heinz said it faced unexpectedly higher costs last year, and it has seen significant pressure on the value of its brands since its $49B merger in 2015.
On its earnings conference call, Bernardo Hees, the company's chief executive officer, said the company was "overly optimistic on delivering savings that did not materialize," while Chief Financial Officer David Knopf said the company is considering selling some brands and assets that have "no clear path to competitive advantage" or have low profit margins. Doing so could better position Kraft Heinz to merge with another company, he said.
DIVIDEND CUT: Along with its disappointing earnings, Kraft Heinz announced on Thursday that it was slashing its dividend to 40c from 62.5c per share. CEO Hees said he believes reducing the dividend "will help us accelerate our deleveraging plan, provide us strategic advantage through a stronger balance sheet, support commercial investments and set a payout level that can both grow over time and accommodate additional divestitures." "By doing this we can improve our growth and returns over time," he added.
SEC INVESTIGATION: Adding to the bad news for Kraft Heinz, the company also revealed that the Securities and Exchange Commission is investigating its accounting practices in its procurement division. The company said it has concluded an internal investigation into the matter, which led to a separate $25M charge in the quarter. The charge related to higher costs for ingredients and other expenses that should have been recorded in previous quarters. Kraft Heinz said that it is cooperating with the agency and that the charge was not material to its Q4 earnings.
WHAT'S NOTABLE: Warren Buffett's Berkshire Hathaway (BRK.A, BRK.B) may lose more than $3B on Friday "after Kraft Heinz revealed a string of disappointing news," CNBC's Thomas Franck reported. According to Franck, Berkshire owned more than 325M shares at 2018-end.
ANALYSTS OVERWHELMINGLY DOWNGRADE STOCK: JPMorgan analyst Ken Goldman downgraded Kraft Heinz to Neutral, but said that despite all of the company's bad news, he would have maintained his Overweight rating if he still had confidence in the company's strategy. Goldman said he is concerned that as soon as leverage comes down "it will jump right back up when the next deal is completed." Stifel analyst Christopher Growe downgraded Kraft Heinz to Hold and said he believes 2019 will now stand as another investment year for Kraft Heinz. He finds the reduction in the dividend "as most concerning," noting it was "seemingly completely disconnected from the business performance and outlook." UBS analyst Steven Strycula downgraded Kraft Heinz to Neutral and said the tenets to his EBITDA recovery thesis are "impaired" following last night's Q4 results.
Meanwhile, Piper Jaffray analyst Michael Lavery downgraded Kraft Heinz to Neutral and said that in light of Kraft's $15B write-down on its key Kraft and Oscar Mayer brands, he's not confident the company can build or maintain the "brand equity needed to compete in today's consumer environment in a sustainable, compelling way." Lavery had been bullish on Kraft Heinz for its role as a likely consolidator in packaged food, but he now believes he was overly optimistic in both its likelihood of getting a sizable deal done and of the quality of the growth profile for any ensuing company.
Kraft Heinz was also downgraded to Hold from Buy at Berenberg, to Equal Weight from Overweight at Barclays and to Neutral from Buy at BofA Merrill Lynch.
OTHER ANALYST COMMENTARY: Wells Fargo analyst John Baumgartner said Kraft Heinz had a "striking breadth of disappointments" with its Q4 report, citing its revenue and margin misses, a FY19 guide- down that was far worse than expected, a "massive impairment" and dividend cut. The analyst, who doesn't "see any need to buy on weakness, maintained his Market Perform rating on Kraft Heinz shares. Credit Suisse analyst Robert Moskow cut his price target to $33 from $42 and said this is not a typical "reset the base and everything will be fine" story, as the dividend cut, $15.8B write-down and the guidance for further divestitures demonstrates the hallmarks of a company with a "serious" balance sheet problem and "pokes an enormous hole" in management's contention that it can execute a meaningful acquisition any time soon.
PRICE ACTION: In morning trading, shares of Kraft Heinz are down over 27% to $35.01.
Kraft Heinz
-13.2 (-27.39%)
Berkshire Hathaway
-6154.99 (-2.00%)
Berkshire Hathaway
-3.72 (-1.81%)