September 1, 2016
PORTFOLIO REVIEW
We are replacing Agrium Inc. (AGU) with The Kraft Heinz Company (KHC).
Kraft Heinz is a producer of processed food and beverages with well-known brand names. Just over a year ago, the two successful companies, Kraft Foods and H.J. Heinz, announced a merger to combine some of the most iconic brands in the packaged foods industry. The deal was overseen and partly financed by the activist investor group Berkshire Hathaway. The company is currently not included in any of Sabrient’s UIT portfolios.
The Kraft Heinz merger that brought together brand names such as Oscar Mayer, Velveeta, Jell-O, Philadelphia, Planters, Maxwell House, and Grey Poupon, is expected to produce large cost-saving synergies that should benefit the company moving forward. KHC believes that it will be able to improve efficiency throughout its supply chain, consolidate management centers, and streamline its corporate structure. The company’s target is reach $1.5 billion in cost savings within the first three years. If costs can be reduced by this magnitude, the company should experience a significant boost to its bottom line. So far, the company appears to be on track to attain its goals as the company has announced earnings that have beat consensus analyst estimates by an average of 15.5% over the last three quarters. Each announcement was received positively by the market, as the company’s stock increased noticeably the day following the results. If the company can continue to produce results above expectations and stay on track to meet management’s goals, then shareholders should be rewarded over the long term.
KHC is currently undervalued based on its expected growth over the next year. The stock is fairly valued when compared to the consumer non-cyclicals sector, while providing significantly more bottom line growth. When compared to the S&P 500, KHC has a price-to- earnings ratio of 24.0 compared to an average of 22.3 for the S&P 500. It is common for companies in KHC’s sector to trade at a slight premium to the overall market based on the relative reliability of demand for its goods. The sector is currently priced at an average of 24.5x next 12 months’ earnings. KHC’s projected EPS growth rate of 39.0% over the next year is greater than the S&P 500’s projected growth rate of 13.4% and the 8.1% for the average consumer non-cyclicals company over the same period.
EXIT (SELL) Agrium Inc. (AGU)
BUY The Kraft Heinz Company (KHC) Market Cap: Large Sector: Consumer Non-Cyclicals Industry: Food Beverages Dividend Yield: 2.7% Forward P/E Ratio (Next 12 months): 24.0 Price When Picked: $89.48 (closing price on 9/1/16)
BUSINESS SUMMARY
The Kraft Heinz Company manufactures and markets food and beverage products in the United States, Canada, Europe, and rest of world. The company’s products include condiments and sauces, cheese and dairy products, meals, meats, refreshment beverages, coffee, snack nuts, dressings, packaged dinners, infant/nutrition products, and other grocery products. It offers its products under various brand names, including Kraft, Oscar Mayer, Heinz, Planters, Velveeta, Philadelphia, Lunchables, Maxwell House, Capri Sun, Ore-Ida, Kool-Aid, Jell-O, Cracker Barrel, Tassimo, Plasmon, Lea & Perrins, ABC, Master, Quero, Golden Circle, Wattie's, and Complan.
The Kraft Heinz Company sells its products through independent brokers, agents and distributors to chain, wholesale, cooperative and independent grocery accounts, convenience stores, drug stores, value stores, bakeries, pharmacies, mass merchants, club stores, hotels, restaurants, hospitals, health care facilities, and certain government agencies, as well as through its own sales organizations.
The company was formerly known as H.J. Heinz Holding Corporation and changed its name to The Kraft Heinz Company in July 2015. The Kraft Heinz Company was founded in 2013 and is headquartered in Pittsburgh, Pennsylvania.
Full disclosure: Sabrient produces portfolios for UITs and indices that are tracked by ETFs. At any given time, we may have 800 of our top-ranked stocks in one or more of these portfolios. Some of the stocks selected for the Earnings Busters portfolio may also be in one or more of our UITs or indices portfolios. We will try to point out when a recommended stock is in one of our UITs or indices.
Editor's Note: The Sabrient Earnings Busters newsletter is written by Daniel Vickers, analyst at Sabrient. Daniel also assists in the selection of stocks and maintenance of the portfolio. He can be reached at [email protected]
Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their own financial circumstances in acting on any stock selection made by Sabrient. Sabrient makes no representations that the techniques used in these reports will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.