3 Reasons To Invest In Kraft Heinz (KHC) Despite Soft Sales

The Kraft Heinz Company (NASDAQ:KHC) is one of the largest branded food and beverage company in the world.

Kraft Heinz formed last year, was the result of the merger between packaged food company, Kraft Foods and ketchup maker, H.J. Heinz Company. Previously known as H.J. Heinz Holding Corporation, the company changed its name to Kraft Heinz post the completion of the merger on Jul 2, 2015. The company started trading on Jul 6.

With a market cap of $108.7 billion, Kraft Heinz markets many iconic brands which enjoy long-standing consumer recognition.

However, Kraft Heinz is observing top-line weakness over the past several quarters. Kraft Heinz’ categories have slowed down owing to soft global retail and consumer demand. Consumption trends in a number of the company’s key categories remain strained.

Why Kraft Heinz Is a Good Choice

Nonetheless, Kraft Heinz is a good investment choice. Here’s why:

Good Rank, Rising Estimates and Share Price: Kraft carries a Zacks Rank #2 (Buy).

Kraft Heinz’ shares have had a good run this year, gaining around 23% year-to-date. Over the past 30 days, full-year 2016 earnings have moved north by 5.5% while that for 2017 has increased 2.9%.

Cost Savings and Productivity Improvements: Though the company’s sales have been relatively soft, cost savings have led to better margins, mainly in the developed markets of the U.S. and Europe.

While organic sales rose only 0.3% in the first-half 2016, adjusted EBITDA rose over 25% on a constant currency basis.

Kraft Heinz has implemented many cost saving initiatives including the integration of Kraft Foods and Heinz. The company plans to save $1.5 billion in annual costs by the end of 2017 focused chiefly on work-force reductions along with factory closures and consolidations. In 2015, the company recognized nearly $125 million of cost savings from merger synergies of combining Heinz and Kraft businesses. The company generated about $535 million of cost savings in the first-half 2016.

Other productivity improvement initiatives include programs such as zero-based budgeting; modernization and capability building within the manufacturing footprint along with building a performance driven culture in the company.

A part of these savings are being re-invested in the business for innovation, brand building and marketing to stimulate top-line growth.

Aggressive Innovation & Marketing Efforts: With growing consumer demand for organic and more nutritional food, Kraft Heinz launched organic Capri-Sun juices and Mac & Cheese dinner (under its Cracker Barrel brand) without artificial ingredients in 2016. It also renovated Kool-Aid Jammers product with fewer calories and no preservatives as well as added a new line of Classico Riserva branded premium pasta sauces made with no artificial ingredients or added sugar. Further, frozen meals with enhanced nutrition is in the pipeline for launch this year.

Moreover, in 2016, the company will continue to focus on shifting advertising spend from non-working (like production costs, advertising agency costs) to working media (digital, print advertisements) and eliminate inefficient trade promotion spending. In fact, management has plans in place to enhance overall marketing spending in markets like the U.S. and Europe in 2016.

The company is also working for whitespace expansion of Kraft and Heinz brands in both food services and international channels.

Conclusion: If the company can manage to show some steady improvement in sales trends, it can be a great stock to own.

Stocks to Consider

Some other food stocks worth considering are Omega Protein Corp. (NYSE:OME) , Ingredion Inc. (NYSE:INGR) and Treehouse Foods, Inc. (NYSE:THS) . While Omega Protein and Ingredion Incorporated sport a Zacks Rank #1 (Strong Buy), Treehouse Foods enjoys a Zacks Rank #2 (Buy).