Kraft Heinz Shares Unlikely To Soar As Supply Chain, Inflation Challenges Loom

Shares of global food and beverage giant, Kraft Heinz (NASDAQ:KHC) have fallen more than 14% since reaching a 12-month high closing price of $44.29 on May 13.

The shares rallied early in 2022, posting a total return of consensus outlook is based on ratings and price targets from 20 analysts. The consensus rating is neutral and the consensus 12-month price target is 13.5% above the current share price.

Source: Investing.com

The consensus outlooks generated by E-Trade and Investing.com are very similar, with a neutral rating. The average of the two consensus price targets is 12.6%, for an expected 16.8% total return over the next year.

Market-Implied Outlook For KHC/h2

I have calculated the market-implied outlook for KHC for the 7.6-month period from now until Jan. 20, 2023, using the prices of call and put options that expire on this date. I chose to analyze options with this expiration date to provide a view through the end of the year and because the options expiring in January tend to be among the most actively traded.

The standard presentation of the market-implied outlook is a probability distribution of price return, with probability on the vertical axis and return on the horizontal.

Source: Author’s calculations using options quotes from E-Trade.

The outlook to Jan. 20, 2023, is generally symmetric, with comparable probabilities for positive and negative returns of the same magnitude, although the peak probability is slightly tilted to favor negative returns. The maximum probability outcome corresponds to a price return of -1.5%. The expected volatility calculated from this outlook is 32.3%.

To make it easier to directly compare the probabilities of positive and negative returns, I rotate the negative return side of the distribution about the vertical axis (see chart below).

Source: Author’s calculations using options quotes from E-Trade. The negative return side of the distribution has been rotated about the vertical axis.

This view shows that, aside from a small range of outcomes, the probabilities of positive and negative returns match very closely (the solid blue line and the dashed red line are almost on top of one another, other than for returns in the range of +/- 7%).

Theory suggests that the market-implied outlook will be negatively biased, relative to investors’ true expectations, because investors tend to be risk-averse and, as a result, will pay more than fair value for downside protection (put options). There is no way to measure the magnitude of this effect, however. In light of the potential for this bias, I interpret this market-implied outlook to be neutral to slightly bullish.

Summary/h2

Kraft Heinz continues to struggle to monetize its increased scale since Kraft and Heinz merged. Current challenges from inflation and supply-chain disruptions have not helped. The company continues to execute quite well, given the challenges. Whether or not the company can build some positive earnings growth momentum remains to be seen.

For income investors, the lack of dividend growth is a negative, despite the fairly high current yield.

The Wall Street consensus outlook continues to be neutral, with a consensus 12-month price target that corresponds to an expected total return of 16.8%. As a rule of thumb for a buy rating, I want to see an expected total return that is at least half the expected volatility (32.3% annualized, in this case). KHC is right on this threshold.

The market-implied outlook for KHC is neutral, with a slight bullish tilt. While the consensus price target and the market-implied outlook suggest a slightly favorable view, Kraft Heinz’s longer-term struggles to grow earnings and the current headwinds related to inflation convince me to maintain my overall neutral rating.

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