A Corporate Merger - Cabot Wealth Network

A Corporate Merger

Today’s Investment of the Week is food and beverage company The Kraft Heinz Company (KHC), maker of dozens of famous brand names, including Jell-O, Velveeta, Oscar Mayer, Maxwell House and many more. Here’s a recent, bullet-point history of the company’s M&A activity:

• July 6, 2015—The merger between the Kraft Foods Group Inc. (KRFT) and the privately-owned H.J. Heinz Co. was completed, forming a new company, The Kraft Heinz Company (KHC).
• March 25, 2015—Kraft Foods Group Inc. (KRFT) and the privately-owned H.J. Heinz Co. announced their intent to merge into one company.
• Oct. 1, 2012—Kraft Foods Inc. (KFT) split into two companies during 2012: Kraft Foods Group Inc. (KRFT) and Mondelez International (MDLZ).

I rarely advise people to invest in stocks when a large corporate merger is taking place. That’s because (a) the merger might fall through, (b) the stock prices usually stagnate for many months, until well after the completion of the merger, (c) the new company’s debt and earnings outlooks remain foggy, until analysts begin to compare statements from company officers to the combined company’s actual quarterly earnings results.

It’s not uncommon for a company to emerge from the M&A transaction with high debt levels, and prospects for slow earnings growth in the coming year. Both of those situations would disqualify the company from a Smart Investing in Turbulent Times Buy rating.

A Strong Buy

In that light, I have not reviewed The Kraft Heinz Company’s stock until this month. I was quite surprised at how attractive the company looks!

First off, the company completed 2015 with a long-term debt-to-capitalization ratio of 27.6%. For a post-merger company that’s a highly unusual—and attractive—number.

Next: the dividend yield is 2.9%. That’s a big dividend for a growth stock!

Kraft Heinz will be busy in the next few years, redirecting sales and marketing efforts, in order to best capitalize on its geographical and product mix. The company reported its first quarter of combined results in late February, surprising analysts with stronger-than expected profit margins.

Here’s the part that shocked me: Wall Street analysts expect the company to grow earnings per share (EPS) by 35.2% and 26.0% in 2016 & 2017. Numbers like that are practically unheard of with huge companies. Yet the 2016 price/earnings ratio (P/E) is only 26.4, indicating that the stock is undervalued vs. its EPS growth rate.

As you can see in the chart, KHC has traded sideways since the merger. That’s a normal, predictable thing for a stock to do, post-merger. Based on recent chart activity, and the incredibly bullish numbers coming from analysts, I believe the stock is about to launch to new highs, beginning this week, and experience a sustainable growth spurt.

khc chart

KHC is a large-cap, consumer staple stock. I rarely recommend consumer staple stocks, because as a group, they’re consistently overvalued. Today, you have a rare opportunity to add a consumer staple stock to your portfolio, at a very fair price.

KHC is a great stock to tuck away in your portfolio for several years. It won’t be able to sustain such strong earnings growth long-term, but while it’s there, investors should capitalize on it!

Happy Investing,

crista huff

Crista Huff
Chief Analyst, Smart Investing in Turbulent Times


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