My baloney has a first name, it's K-R-A-F-T. My baloney has a second name, it's H-E-I-N-Z.
Yes, that twist on the old Oscar Mayer ad is the exact way I feel about Kraft Heinz (KHC) after last week's flabbergasting bottom line miss, SEC investigation, $15 billion write down of its Kraft and Oscar Mayer namesakes and a staggering near-one-third slash in the dividend, from $0.625 to $0.40.
The company that is the merged Kraft and Heinz companies has long been revered by Wall Street because of the legendary way that 3G, its managing entity -- with CEO Bernard Hees -- has cut costs to bring great gains to the bottom line. The Street also loved that Warren Buffett owns almost 27% of it and that old Warren had been on the board since last spring while two of his most able lieutenants -- one of them being Greg Abel, just praised in Warren's annual letter this weekend -- currently serve as directors.
But there is reverence no more. Instead, there is just intense derision, as seven different firms took it from buy to hold as recognition set in that its style of making acquisitions and then cutting costs has failed to generate any growth at all. Its earnings before interest, taxes, depreciation and amortization (Ebitda) have been flat over five years and its stock has declined from $72.96 on its first day of trading as a joint entity, to $38.24, a 45% loss versus a minus 1% performance for the average food stock and a 34% APPRECIATION for the S&P.
It's been truly disastrous.
You know what, though? The statistics don't tell the actual truth of what's happening here -- and I think that's because the management "can't handle it," as Jack would say in A Few Good Men.
First, let's just deal with the immediate issue at hand: The conference call, the proximate cause that brought the stock down so hard -- to the point that, once again, astoundingly, it's one of the highest yielders in the group.
At no point does the company confront anything involving the $15 billion charge, which cuts to the core of the lack of relevancy of the used-up brands that are Kraft and Oscar Mayer.
Instead, management blathers on about how the company had 4% organic growth, through mix and sales, and still has best in class margins, although it would have been put in a more painful -- yet illuminating -- light if the company had revealed that its margins have come down drastically in the last few years, so the lead over others is not what it once was.
Bernard Hees talked endlessly about all of the white-space opportunities, the terrific new line extensions, the "consumption turnaround," the distribution gains, the sustainability of growth, and my favorite, "breakthrough innovation" -- a litany of positives that you would think would produce an increase in its dividend, not a huge gash to it. That is not the stuff that produces a $0.10 earnings miss, off a $0.94 basis -- 11% below expectations -- or a 2019 sales guide for $6.3 billion to $6.5 billion, 14% below consensus.
It all seems like baloney to me.
What's the real issue here? I think it cuts to the core of what's happening in our culture, something that Hees and Company never want to admit, because it would simply be a total refutation of their management style.
In this day and age, you can't make relevant the irrelevant, you can't bring back from the dead brands from my generation that have lost their raison d'etre. More importantly, you certainly can't revive them if you are going to cut into the support that the company had provided for years, even if some of that support may have been too expensive versus its gains and if there were too many people and too much waste involved in the creation and promotion of the product.
Hence the need for one of the largest impairment charges in history, a recognition by management, in deed if not in word, that these brands can't come back and produce the sales that management thought when it acquired them.
The problem I have is how many more Krafts and Oscar Mayers are there? How many more writedowns are we in store for here? After all, is this really the era for Jell-O, Miracle Whip, Kool-Aid, Stove Top, Shake & Bake or Kraft Mac & Cheese? Is this when you want to make the bet on Kraft Salad Dressing, Crystal Light, Cool Whip, Country Time, Velveeta or Maxwell House, which is now rumored to be on the block after missing out on the entire revolution in non-industrialized coffee?
When I hear these brands, I always think of one thing -- the Cuban Missile Crisis -- because the house my friend Frankie grew up in, the one at the end of the block, had a fall-out shelter in it stocked with all of these brands, because they could survive thermonuclear war without going bad. In fact, the only one that wasn't Kraft may have been Chef Boyardee from Conagra (CAG) , another indestructible foodstuff.
But nowhere, not even in one small nook or cranny, does the management of Kraft Heinz address the fact that its brands are what are known as 'pantry brands' from the center aisle of the supermarket, when the younger generations that are so busy inheriting the earth don't like pantry brands -- they want, if they can afford it, to buy fresh and organic. The operative term, I know, is "afford" -- and I believe that both frozen food producers as well as Kraft Heinz can be forced by the Walmarts (WMT) of the world to cut prices so their goods can be afforded, a major reason why the leverage to expense cuts are now gone.
So you have the unholy trinity of the need to support brands, while your raw costs are going up -- something mentioned repeatedly on the call -- and the consumer is turning against you.
What about all of those glorious positives the company provided that are meant to blot out the negativists? I think that you can certainly increase sales by cutting price, but to what end? You need both sales and profit growth, and Kraft Heinz isn't going to give you either on a sustainable basis, or earnings estimates wouldn't be slashed to the point where 2020 goes from $3.80 to $3.15.
So why were the analysts so ga-ga for it before Friday? One word: Unilever (UL) . The stock of Kraft Heinz bolted up ten points from $88 to $98 almost three years ago when it made a $143 hostile billion bid for competitor Unilever. The thought at the time was that such an acquisition could be as much as 25% accretive.
The company famously withdrew the bid when Unilever's management shouted holy hell and Warren Buffett said Berkshire could not support a hostile takeover.
The analysts, however, loved the idea of a consolidator on the prowl looking for the next big game, and they were stunned when Kraft Heinz was so brutally rebuffed. It has really been down hill ever since, although the analysts hung on, betting that there would be another deal.
Now, the company's doing nothing to quell the acquisition talk. Its management even had the gall to say that it is slashing the dividend in part to raise a war chest to be ready for industry consolidation. But the Street doesn't want to hear it anymore, now that the company has to spend back what it cut just to stay even, if that. How apoplectic were the analysts on the call? They seemed to be willing to overlook the SEC investigation into the company's procurement systems entirely, something that would have dominated many a conference call another time.
I warned people not to reach for the stock of this high-yielder back in November of last year, fearing a dividend cut. Ironically I still feel this way, ironically because the yield's the same but the dividend itself is much lower. I fear that the earnings cuts aren't done and an even higher yield awaits long-suffering shareholders. Anything can bounce. But it's not worth buying for the bounce. In fact, short of Warren Buffett buying the rest because he still believes in those old brands, it's not worth buying at all.