Kraft Heinz's 'Black Box' Approach To Accounting Is Hurting Shareholders

Susquehanna’s Pablo Zuanic maintained a Positive rating for Kraft Heinz Co KHC, while reducing the price target from $104 to $93, even after the company reported a solid beat in its 4Q15 adjusted EBITDA.

Kraft Heinz reported its adjusted EBITDA up 380bp, versus consensus expectation of 120bp. Analyst Pablo Zuanic believes that the guidance of $1.5Bn in cost synergies appears overly conservative. He mentioned that “trade spending efficiencies alone could add another $1.5Bn to the bottom line by end of year 3.”

Zuanic expects the company’s EBITDA to grow from $6.7Bn in FY15 to $10.1Bn by FY18 and free cash flow to rise from $1.8Bn in FY15 to $5.8Bn by FY18. He commented, however, “We emphasize this is a three-to-four-year story and that one-year forward valuation multiples do not capture the upside.”

So, What Went Wrong?

The downward revision in price target reflects poor disclosure, after a thorough review of Kraft Heinz’s recently filed 159-page 10-K, the lack of visibility into adjusted EBITDA and lack of explanation for margin expansion so far, Zuanic mentioned.

Kraft Heinz was becoming “too much of a black box,” with a large number of adjustments, the analyst said, while adding that the story was losing its luster on account of poor visibility.