Kraft Heinz Analysts Failed Investors by $18 Billion

(Bloomberg Opinion) -- The blueprint for Kraft Heinz Co.’s business model was utterly invalidated last month, but red flags were there all along. Where were Wall Street’s analysts?

The packaged-food company, in reporting earnings on the evening of Feb. 21, delivered an onslaught of negative announcements: a $15.4 billion goodwill writedown, a dividend cut and a U.S. Securities and Exchange Commission subpoena regarding certain accounting policies. Right up until then, at least 14 of 24 analysts tracked by Bloomberg were still recommending that investors buy the stock. Shares of Kraft Heinz plunged 27 percent the next day, and haven’t recovered, for a loss in market value since then of about $18 billion.

Kraft Heinz Analysts Failed Investors by $18 Billion

The drastic sell-off would have one think the developments were shocking. But Kraft Heinz’s downfall was largely foreseeable, and too many analysts ignored the warning signs

The slash-and-burn strategy implemented by Kraft Heinz’s private-equity managers always had an expiration date. There are basically two ways profit margins can widen: shrinking costs or rising sales. As I’ve written before, common sense dictates that a business can’t cut costs forever, and Kraft Heinz hasn’t been investing enough in its products to sustain sales growth — especially at a time when consumers have been turned off by dated brands known for processed foods. And there’s only so much fresh thinking you can do around condiments: Kraft Heinz’s latest expansion into mayonnaise variations with the introduction of Mayomust and Mayocue may be about as far as it can go there. 

In September, Kraft Heinz had $44 billion of goodwill on its balance sheet, the equivalent of about 65 percent of the company’s market value and a third of total assets — among the highest ratios in the S&P 500 index. It also has more than $30 billion of debt.

One of the earliest and rare bearish ratings for Kraft Heinz came from Robert Moskow of Credit Suisse Group AG in April of last year. He presciently wrote this in a report to clients at the time: 

The new leadership at Kraft Heinz talks a lot about the importance of growth, but we don’t see evidence of significant product innovation coming out of the business. 

By Bloomberg’s count, still only two other analysts have joined Moskow in suggesting investors just dump the stock. Most have switched to ineffectual “hold” ratings. 

I’m reminded of Netflix Inc.’s viral movie sensation “Bird Box,” in which the characters were safe from the frightening destruction of the world around them so long as they kept wearing blindfolds. Let Kraft Heinz be a lesson: it doesn’t work. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tara Lachapelle is a Bloomberg Opinion columnist covering deals, Berkshire Hathaway Inc., media and telecommunications. She previously wrote an M&A column for Bloomberg News.

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