Susquehanna Upgrades Kraft Heinz On Earnings Growth, M&A Potential

• Kraft Heinz Co KHC shares are down 7 percent in the last three months.
• Susquehanna’s Pablo Zuanic upgraded the rating for the company from Neutral to Positive, while raising the price target from $86 to $98.
• Further M&A activity and higher EPS estimates could boost Kraft Heinz’s shares, Zuanic stated.

The market currently seems to be favoring consumer staples. Analyst Pablo Zuanic commented that in such a market, “self-help stories” that have higher exposure to North America as well as “optionality” are preferable.

Kraft Heinz is in the process of integrating the acquisition of Kraft Foods Group Inc KRFT, which has 95 percent exposure to North America. Moreover, Kraft Heinz could continue to seek further M&A, and its net debt to EBITDA should be around 2.5x by 2018, Zuanic said, while adding, “KHC fits our new investment paradigm.”

The analyst expressed optimism regarding Kraft Heinz being able to grow EBIT by $3Bn by 2018, which is double the guidance of annualized cost savings of $1.5Bn. He mentioned that the optimism resulted from:

Overlapping overheads and sales/distribution functions alone should account for 10-12 percent of sales, while the $1.5Bn guidance assumes 8 percent.

Margins at Heinz Europe expanded by 16bps over two years, and “we now realize this was not just cost cutting but also more efficient trade spend management,” the Susquehanna report stated.

The history of the Anheuser Busch Inbev SA (ADR) BUD team and 3G suggest gains of 15-20 percent for the most part. “Also, while we have used BUD as the benchmark, we now realize the “efficiency” opportunities are much greater at inefficiently run food conglomerates compared with beer companies mainly focused on selling beer,” Zuanic explained.

While the price target reflects 30 percent upside, there could be further upside in view of the fact that the 2019 EPS estimate is approaching $5 and there could be additional accretive M&A activity.