Kraft Heinz Co. (KHC) is set for its lowest open of the Warren Buffett era on Friday after a catastrophic fourth-quarter earnings report on Thursday evening.
Shares of the food giant are down by more than half since the merger of Kraft Foods and H.J. Heinz in 2015, costing Buffett's Berkshire Hathaway (BRK.A) billions on the way down due to Berkshire's 7.66% stake in Kraft Heinz. If the slide in pre-market trading holds, about $15 billion of the conglomerate's market capitalization would be wiped out as Kraft Heinz's shares are indicated to open 25% lower than Thursday's close.
The results in the quarterly call were certainly bleak and included write-downs totaling as much as $15.4 billion due to deceleration in key businesses. Executives also set very weak guidance into 2019; they put earnings in the range of $6.3 billion to $6.5 billion, which would be down more than 8% from last year at the higher end and well shy of the analyst consensus that stood at $7.5 billion prior to the call.
Kraft Heinz largely blamed issues with staple brands such as Kraft and Oscar Mayer for its disappointing results. Its "industry leading" margins were also eroded sharply, de-emphasizing a key aspect of the post-merger strategy of Buffett and partner 3G Capital.
The company also slashed its dividend to an annualized rate of $1.60 a share from $2.50 as it pursues a "deleveraging process to provide greater balance sheet flexibility."
"There is no question we are disappointed that profitability did not ramp up with consumption gains as anticipated. We were overly optimistic on delivering savings that did not materialize by year-end." CEO Bernardo Hees admitted to analysts on Thursday evening. "For that, we take full responsibility. And we have taken steps to ensure this does not happen again by touching planning process, procedures and organization structure."
Still, the gloomy guidance into 2019 was not reflective of any short-term fixes.
"While we expect to take a step backwards in 2019, we remain confident in delivering consistent profit growth from 2020 onwards, driven by fully leveraging our advantage brands, cost structures and capabilities," CFO David Knopf said.
To top off the shocking report, the company disclosed a subpoena it received from the U.S. Securities and Exchange Commission (SEC) with regard to its accounting practices. The company has said it is cooperating fully.
Analysts, while still maintaining a "Hold" consensus, struggled to find the panacea to the myriad of problems confronting the highly levered company.
"We have been bullish on KHC for its role as a likely consolidator in packaged food, but now believe we likely were overly optimistic in both its likelihood of getting a sizable deal done and of the quality of the growth profile for any ensuing company," Piper Jaffray analyst Michael Lavery said. "In light of its $15 billion write-down on its key Kraft and Oscar Mayer brands, we are not confident it can build or maintain brand equity needed to compete in today's consumer environment in a sustainable, compelling way."
Lavery joined a chorus of downgrades on the stock, taking his rating from "Overweight" to "Neutral" and reining in his price target from $62 per share to just $42.
J.P. Morgan analyst Ken Goldman followed suit, questioning the merit of the merger between Kraft Foods and H.J. Heinz after the quarter's catastrophe.
"The midpoint of 2019 EBITDA guidance (is) below what KHC printed on a pro-forma combined basis in 2014," Goldman noted. "We thus think it is more than fair to ask if any fundamental value for KHC has been created since the Kraft Heinz merger. We also think that between KHC's and ABI's struggles in recent years, it is reasonable to question the entire 3G strategy."
Given the pressing questions, Goldman downgraded KHC to "Neutral" as well, cutting his price target from $52 to $37 per share.
"In our opinion, the upside case that used to exist (value creation via M&A and cost cutting) has vanished, at least for the time being," Goldman concluded.
