Kraft Heinz Co (KHC) Needs Major Acquisition to Drive Stock ‘Meaningfully Higher’: Wedgewood

Wedgewood Partners, a Missouri-based investment firm, recently released its Q4 investor letter in which it discussed Kraft Heinz Co (NASDAQ:KHC) and other companies. We have already covered the firm’s viewpoint on Apple and Celgene. In this article, we’ll take a look at what Wedgewood think about Kraft Heinz, a $97-billion market cap food giant which is hungry for growth.

In the letter to investors, Wedgewood mentioned that Kraft Heinz underperformed during the past quarter and throughout the year due to “tough conditions in the traditional branded food industry – primarily negative volume growth, as well as pricing pressure from retail customers intent on giving away their profits to chase market share – weighed on the company’s results.”

Further, the firm noted that investors want Kraft Heinz to “execute another major acquisition” that would open new growth opportunities and would drive the stock price higher.

This failed to materialize in 2017, although the company did make an ultimately abandoned approach for Unilever early in the year, according to the letter.

Wedgewood said it was impressed with management’s ability “to cut costs and to improve margins at the businesses it has integrated, but, with over $1.5 billion of cost savings already behind us, and with volume growth nowhere to be seen, we believe we need to see a major acquisition to drive the stock meaningfully higher.”

The investment firm added that Kraft Heinz Co (NASDAQ:KHC) remains active in “its pursuit of acquisitions and this would seem to be an ideal environment for buying, between still-low interest rates, relatively lower valuations across the Consumer Staples sector, and nearly limitless available liquidity between Kraft Heinz and its co-sponsors, 3G and Berkshire Hathaway.”

We believe acquisition integration and operational and financial improvement are core strengths of the organization, and we would be positively biased toward any acquisition. With all of this in mind, we did trim our position in the stock throughout the year, particularly as we saw the stock bouncing off of all-time highs while the fundamental performance of the company, in terms of volume/revenue/profit growth, was struggling. In the most recent quarter, we were relieved to see underlying organic performance improve somewhat, but we continue to believe the growth we require will only come from a continuing acquisition strategy, and we are monitoring this situation closely.

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Shares of Kraft Heinz Co (NASDAQ:KHC) have lost more than 10% of its value over the last 12-month period. However, the stock has moved up 3.03% during the last three months. The food company trades with a P/E ratio of 24.83x, versus the industry average of 21.2x.

Meanwhile, KHC is a popular stock among hedge funds covered by Insider Monkey. There were 54 funds in our database with bullish positions in the food company.

Recently, Jefferies analyst Akshay Jagdale called Kraft Heinz a “best-in-class” stock given the company’s acquisition strategy, as reported by CNBC.