The Expansion of the Kraft Brand as we Know it TodayIn 1985 with the goal of diversifying its product portfolio; Phillip Morris Cos, the world's leading tobacco company now known as The Altria Group, (:NYSE:MO) acquired General Foods agreeing to pay the newly acquired company's stockholders $5.8 billion dollars in cash at $120 per share. Brands under General Foods at the time of acquisition included staples such as: Birds Eye Frosted Foods, Oscar Mayer, Jell-O, Pop-Rocks, Cool Whip, the leading cereal brand; Post, Maxwell House, Kool-Aid, and more. The deal allowed for General Foods to operate as its own company under the Phillip Morris umbrella. Upon the announcement of the acquisition shares of General Foods rose from $6.25 per shares to $117 on the NYSE Chicago Exchange before trading was ultimately closed.
Just a few years later in 1988 Phillip Morris would continue growing its food segment through its acquisition of Kraft Foods paying shareholders $106 a share in a deal valued at $13.1 billion. Like with General Foods, the deal would allow Kraft Foods to operate independently of Phillip Morris. Notable Kraft brands at the time of acquisition included: Kraft Singles, Velveeta, Kraft Mayo, Miracle Whip, Capri Sun, and Philadelphia Cream Cheese. In 1989 Kraft Foods and General Foods under Phillip Morris would merge and become Kraft General Foods, Inc. In 1995 Kraft General Foods reorganized into a singular operating company and was renamed to Kraft Foods, Inc.
5 Years later in the year 2000, Phillip Morris would acquire Nabisco for $55 a shares in a deal totaling $14.9 billion. Nabisco's brand portfolio at the time of acquisition included a multitude of snack brands such as: Oreo, Chips Ahoy!, Fig Newtons, Wheat Thins, Planters, Ritz Crackers, Honey Maid Grahams, and others. Phillip Morris would then merge Nabisco into Kraft Foods, making Kraft Foods into a global super brand within the foods sector, second only to Nestle (NSE:NEST). (:NSRGY)
Source: Kraft Foods, Inc 2006 Annual Report.
In 2003 Phillip Morris Cos. was renamed to The Atria Group, (:MO) though it remained the parent company of Phillip Morris International, Phillip Morris USA, and Phillip Morris Capital Corporation and Kraft Foods, Inc.
Kraft Foods, more than ever before, would go on to continue dominating grocery and snack shelves across the US throughout the 2000s and early 2010s. In 2006 Atria Group in their 2005 Annual Report would reveal that their food segment had accounted for about 35% of the yearly revenue while their tobacco segment had accounted for about 65% of its revenues.
Source: Altria Group 2005 Annual Report
Kraft Foods between 1989 and 2006 under the watchful eye of its parent company, The Altria Group, was given a free ticket to expansion as the parent aggressively acquired and merged companies into Kraft Foods. This enabled Kraft to grow from being just a simple Cheese and Dairy company to being a major competitor in the snack and grocery sector, with its Snack Segment contributing to most of the growth as seen in Kraft's 2006 Annual Report.
A Concerning Trend of Divestiture Emerges
Though Kraft contributed to a significant portion of Altria's revenue through its food segment, the 2005 report made it clear that Altria's tobacco segment greatly outperformed it and that's when discussions of a spin-off Kraft Foods began. The spin-off would commence on March of 2007 and was done so that The Altria Group could focus more on their higher performing tobacco segment and thus the newly organized Kraft Foods, Inc was formed and listed on the stock market under ticker symbol: KFT.After Kraft Was spun-off from its parent in 2007 we would start to see cracks form in its foundation during the same year when the company sold it's breakfast cereals division (Post), to Ralcorp, the largest US private label food manufacture, for $2.6 billion. Ralcorp would then face multiple hostile bids from ConAgra (:CAG) to take over the company, Ralcorp repeatedly denied them. Ralcorp in 2011, seeing imminent threat of a ConAgra takeover decided to spinoff their Post cereal unit into separate company: Post Holdings, (:NYSE:POST) which went on to become publicly traded in 2012. After Post was spun-off ConAgra would acquire Ralcorp for $5 billion making ConAgra, (:CAG) the largest private-label food manufacturer in the North America. As for Post Holdings, (:POST) the company would go on to dramatically increase its operating income, increasing at a consistent pace from losing $0.455b in Q3, 2014 to making $0.875 billion in Q4, 2022. Meanwhile Kraft which would later Merge with HJ Heinz in 2015 to form Kraft Heinz (:KHC) would see an overall drop in Net Income dropping from a peak of $11 billion in Q1, 2018 to a tough of negative $11 billion in Q2, 2019 only for it to marginally recover to around $1.2-$3 billion in the quarters following. However the current trajectory of their incomes seems to curving downwards again with (:POST) curving upwards not to mention Post Has had a much more consistent trend in Net Income versus Kraft Heinz (:KHC) which has been volatile and quite frankly unstable during the same period:
Source: MacroTrends.net
Dialing back to 2010, Kraft Foods, Inc sold off its frozen pizza division to Nestle for $3.7 billion, the assets of this sale included the frozen pizza brands: DiGiorno, Tombstone, California Pizza Kitchen, and Delissio, therefore selling off its throne of being the leader in frozen pizzas to its bigger competitor, Nestle.
Just a few years after selling off its Post cereal unit and its frozen Pizza unit, Kraft Foods, inc on October 1, 2012 completed a spin-off from Kraft Foods Group, Inc, taking most of the Snack and Nabisco division with it and renamed itself Mondelez (NASDAQ:MDLZ) International, Inc and trades under the ticker (:MDLZ). The KFT ticker was retired and the Kraft Foods Group began trading under the ticker KRFT. For every 1 share of MDLZ owned, shareholders received 0.33 shares in KRFT in addition receiving to cash to cover any fractional shares of KRFT.
Kraft Foods Group was left with only it's Grocery segment after the spinoff and it can very much be implied that the newly formed Mondelez maintained most of the essence that allowed Kraft Foods to dominate store shelves while the newly formed Kraft Foods Group was just failing shell of its former greatness, this reality seems to have been baked into the companies' market caps as MDLZ, following the spinoff traded from a low of $58.27 billion in 2018 to a high of $105.63 billion in 2023.
Source: companiesmarketcap.com
Meanwhile following Kraft Food Group's merger with HJ Heinz, Kraft Heinz (NASDAQ:KHC) would lose more than two-thirds of its market cap between May 30, 2017 and March 30, 2020 dropping from $112.27 billion to $30.23 billion with the majority of this decline happening rapidly and well before the effects of the COVID-19 pandemic hit the markets in 2020. Since then shares of KHC have attempted a recovery, rising to a peak of $54.21 billion in May of 2022 but it has since gone back on the decline and is on a trajectory to trade at an all-time low market cap, currently sitting at $34.47 billion as of January 2025.
Source: companiesmarketcap.com
HJ Heinz May Have Overpaid For Kraft Foods GroupIn 2015, HJ Heinz under the ownership of 3G Capital and Berkshire Hathaway (NYSE:BRKa), (NYSE:BRK.A) merged with the Kraft Foods Group, creating the newly merged Kraft Heinz Group, (NASDAQ:KHC) the structure of this merger left Kraft shareholders with 49% stake in the new company while 3G Capital and the Warren Buffet owned- Berkshire Hathaway retained a 51% stake in the company. Along with this, Kraft shareholders were paid a special cash dividend of $16.50 per share paid for by the owners of HJ Heinz (3G Capital and Berkshire Hathaway.) The merger valued Kraft at $46 billion dollars and likely a merger that the Heinz owners greatly overpaid for given the fact that Kraft Food Group had under gone so much divestiture and spin-offs leading to the deal. It is in my opinion that the owners of Heinz greatly underestimated these factors and were instead fixated on the kind of company Kraft was prior to splitting off from Altria in 2007, rather than taking into account all of the negative aspects that happen with Kraft after the split between 2007 and 2015. HJ Heinz likely would have been much better off merging with snacks focused Mondelez as that was the better performing side of the company, though it is unclear if Mondelez would have accepted such an offer given their independent success. I think that shareholders of Kraft Heinz noticed this dynamic only after the merger which is why we see the rapid declines in KHC begin in 2017 and end with it losing over two-thirds of its value by 2020.
The Divestiture Continues...Even as a newly merged company Kraft Heinz continues the trend of selling off Kraft's segments, with the most recent one being in Q1 of 2021 when Kraft Heinz announced the selling of its entire nuts segment to Hormel Foods (:NYSE:HRL) in a cash transaction for $3.35 billion, the assets included in the sale were most of the products sold under the Planters brand, including single variety and mixed nuts, trail mix, Nut-rition products, Cheez Balls, Cheez curls, and the Corn Nuts branded products. On May 13, 2024 Kraft Heinz then announced that it was exploring the sale of its Oscar Mayer segment, looking for anywhere between $3-$5 billion.
Financial MetricsFollowing the merger KHC's Total (EPA:TTEF) Assets almost immediately jumped up to a peak of around $121 billion in 2015 but it has since steadily declined now sitting at around $88.57 billion in 2024, representing around a 27% decrease in asset value since the merger.
Source: MacroTrends.net
What's worse is that Kraft Heinz's Cash Balance has been on the decline since 2019 and now remains at the lows just around a billion dollars.
Source: MacroTrends.net
Above we can see Kraft Heinz's Cash Balance fall from $5.5 Billion down to $1 billion over a 3 year period; I find this concerning given the fact that KHC's Net Income remains relatively low and starting to fall again. If this trend continues the company may seek to raise cash in other ways either by raising debt, diluting its shareholders, or doing what it always has done in the past and sell off more of its intellectual properties. Lastly to add to the uncertainty, KHC's Debt to EBITDA sits at a ratio of 5.12x putting is almost 3 times above that of the industry median of 2.05x:
Source: GuruFocus.com
KHC's Net Debts currently sit at $19.25 billion, that adds up to be more than half of the company's present market cap of $34.4 billion.
Source: TradingView.com
This puts KHC's ratios at the top of the list in terms of indebtedness when compared to its closest peers in the industry:
Source: GuruFocus.com
Lastly, KHC's PE ratio sits at 25.68x, peaking at 138.03 over the past 10 years ranking it worse than 68.04% of 1386 companies within the same industry.
Source: GuruFocus.com
KHC's High Debt's paired with Falling Net Incomes, Sticky Debts, Falling Total Asset Value, and Divesting Tendencies makes me question why investors would want to pay 25.68x earnings for and share of the company especially when its peers like Hormel Foods and General Mills (NYSE:GIS) can potentially provide 2-3 times as much value with much less exposure to debt risks.
Technical Outlook
Source: TradingView.com
KHC has been rejected from the 0.618 Fibonacci Retrace 3 times and has since formed a Bearish Head and Shoulders pattern along with a trend of making slightly lower highs on each rejection following the head, before then finding support around the same low. Upon making a third lower high the price action has broken below the supportive low and looks to be staging a breakdown to the 0.886 level down at around $17.94 which should bring the PE/Ratio down to a fairer valuation of around 15x
This content was originally published on Gurufocus.com
