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Kraft Heinz’s Rough Week: Q4 Selloff Followed Up With Rating Downgrade

  • Kraft Heinz reported a Q4 earnings beat but failed to offer a clear vision for 2020.
  • Management won't update investors until an investor conference in May.
  • Rating agency Fitch downgraded Kraft's bond status to junk.

Food company Kraft Heinz reported Thursday fourth quarter results which came in mixed but investors punished the stock amid lack of clarity for 2020. Just one day later, credit rating agency Moody’s downgraded Kraft’s bonds to junk status.

Q4 Review

Kraft said it earned 72 cents per share in the fourth quarter on revenue of $6.54 billion versus expectations of 68 cents per share and $6.61 billion. The headline mixed numbers were followed up with an organic revenue growth miss at negative 2.2% versus expectations of negative 1.33%.

By management’s own admission in the earnings report, it’s 2019 performance was “disappointing.” Any turnaround will “take time” to accomplish and management has so far just taken steps to build on a foundation for growth.

“We have taken critical actions over the past six months to re-establish visibility and control over the business,” the company said in its earnings report. “And we remain convinced Kraft Heinz has the potential to achieve best-in-class financial performance.”

So what are some of Kraft’s strategies to achieve unspecified goals? Investors were left in the dark. During the company’s post-earnings conference call, management said it will offer investors an inside look at its strategic plans in May at a scheduled investor meeting.

All management revealed at this time is 2020 will be a “year of stabilization, not a year of offense.” This would mark a change from 2019 which was a “period of new understanding.”

Management’s decision to keep investors in the dark prompted a selloff in the stock throughout Thursday’s trading sessions. Comments like “knowing you have problems is the first step” might be well-meaning but the market spoke and declared it to be insufficient.

Rating Downgrade

Kraft’s rough Thursday was followed up with a rating downgrade from Fitch Ratings. The food company’s debt rating was slashed from BBB- to BB+ which now places it in junk status.

According to Seeking Alpha’s coverage of the downgrade, Fitch is considered with Kraft’s elevated leverage will stay above four times for a “prolonged period” of time.

The food company faces EBITDA challenges and could find it difficult to reduce its near-term debt load. Fitch believes Kraft’s EBITDA in 2020 will be nearly 8% but management remains steadfast in paying investors a consistent dividend.

“Fitch estimates the company may need to divest up to 20% of its projected 2020 EBITDA to support debt reduction necessary to reduce leverage to below 4.0x versus 2019 leverage of 4.8x,” the rating agency noted.

About the author

Jayson Derrick
Jayson Derrick
Jayson Derrick has been writing professionally about stocks since 2011. He is particularly interested in alternative investments, hedge funds, and activist investing. He is a big fan of NHL hockey and lives in Montreal, Canada with his wife and four year old daughter.

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