Kraft Heinz (KHC): A Beat In The Cards This Earnings Season?

We expect The Kraft Heinz Company (NASDAQ:KHC) to beat expectations when it reports third-quarter 2016 numbers on Nov 3, after the closing bell.

Last quarter, the company posted a positive earnings surprise of 19.72%.

The packaged food manufacturer delivered positive earnings surprises in three of the past four quarters, the average surprise being 5.22%.

Let’s see how things are shaping up for this announcement.

KRAFT HEINZ CO Price and EPS Surprise

KRAFT HEINZ CO Price and EPS Surprise | KRAFT HEINZ CO Quote

Why a Likely Positive Surprise?

Our proven model shows that Kraft Heinz is likely to beat earnings because it has the perfect combination of two key ingredients.

Zacks ESP: Earnings ESP for Kraft Heinz is +2.63% because the Most Accurate estimate is pegged at 78 cents while the Zacks Consensus Estimate is at 76 cents. A favorable Zacks ESP serves as a meaningful and leading indicator of a likely positive earnings surprise. Please check our Earnings ESP Filter that enables you to find stocks that are expected to come out with earnings surprises.

Zacks Rank: Kraft Heinz currently sports a Zacks Rank #1 (Strong Buy). Note that stocks with a Zacks Rank #1, 2 (Buy) or 3 (Hold) have a significantly higher chance of beating earnings estimates. Conversely, Sell-rated stocks (Zacks Rank #4 or 5) should never be considered going into an earnings announcement.

The combination of Kraft Heinz’ Zacks Rank #1 and +2.63% ESP makes us reasonably confident of an earnings beat.

What is Driving the Better-than-Expected Earnings?

Although this Pittsburgh, PA-based packaged food company has been witnessing soft sales in recent times, cost savings have improved margins, mainly in the developed markets of the U.S. and Europe. A portion of its savings is also being re-invested in innovation, brand building and marketing to stimulate top-line growth. The company’s adjusted EBITDA rose 17.7% year over year in the second quarter backed by cost savings from restructuring activities/integration program and pricing gains. On a constant currency basis, adjusted EBITDA grew 23.1%.

It is important to note here that the company is witnessing lower volumes and share losses in the U.S. due to weak category trends. Reduced spending by the U.S. shoppers and a shift in consumer preference toward natural and organic ingredients over packaged and processed food has been hurting the company’s business. Category trends and market share performance are likely to remain under pressure in the third quarter and through the rest of 2016. Management had already warned that consumer trends are likely to affect results in North America and Europe in the second half of the year.

That said, management plans to save $1.5 billion of annual costs by the end of 2017, mainly through workforce retrenchment, factory closures and consolidations. The company has garnered about $535 million of cost savings in the first half of 2016. Kraft Heinz is also working on whitespace expansion of the Kraft and Heinz brands in food services as well as international channels. This should reflect in the to-be-reported quarter results as well.

For the third quarter, the Zacks Consensus Estimate for earnings is pegged at 76 cents, reflecting a significant 73.4% year-over-year increase. Meanwhile, our estimate for revenues is $6.31 billion, implying 3% growth.

Other Stocks to Consider

Here are some other companies in the consumer staples sector that can be considered as our model shows that they have the right combination of elements to post an earnings beat in their upcoming releases:

Avon Products Inc. (NYSE:AVP) , slated to report third-quarter 2016 results on Nov 3, has an earnings ESP of +33.33% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Hormel Foods Corporation (NYSE:HRL) , scheduled to report fourth-quarter fiscal 2016 results on Nov 22, has an earnings ESP of +4.55% and a Zacks Rank #3.

Sanderson Farms Inc. (NASDAQ:SAFM) has an earnings ESP of +1.89% and a Zacks Rank #1. The company is scheduled to release its results on Dec 15.

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