Kraft Heinz Stock Isn't Very Tasty

On Thursday, Kraft Heinz (KHC) reported better-than-expected earnings results, despite overall weak demand for packaged food and beverages. Can this stock keep going higher on engineered earnings?

Year to date, shares of Kraft-Heinz are up 25%, but the company has no real revenue growth. Kraft Heinz reported third-quarter earnings of 83 cents per share, 9 cents better than the consensus estimate. Sales declined 1.5% to $6.27 billion, vs. the $6.3 billion estimate. Adjusted earnings before interest, taxes, depreciation and amortization jumped 21.7% to $1.8 billion. Kraft Heinz earned $842 million in the third quarter.

Total organic sales fell 1%. North American organic sales were down 1.2%, Europe declined 7.8%. Only the rest of world (3.6%) and Canada (2%) were up.

The better-than-expected earnings mostly came from lower expenses and better margins. During the quarter, the company saved $300 million in integration savings. Since the merger of Kraft and Heinz, the company has cut out about $1.3 billion of management's $1.5 billion target. Adjusted EBIDA was higher than expected because the company was able to cut more deeply than analysts had modeled.

The company also saved about $11 million because of lower commodity costs, but that was down from $50 million in the second quarter. As commodity prices firm up, it's unlikely the company will get much of a benefit from lower commodity prices going forward.

Third-quarter operating margin rose to 22.5% from 18.5% in the second quarter.

For fiscal 2016, analysts estimate the company will earn $3.24 per share and $4 next year. But that 23% earnings growth is based on a total sales decline of 4% in 2016 and a 0.3% increase in revenue in 2017.

And that's my problem with the stock. There is no revenue growth.

Earnings and margins are being driven by expense reduction. And those cost reductions are close to winding down. Of the $1.5 billion target, the company has already chopped out $1.3 billion. Investors need more cuts if the stock is going to move any higher.

Some analysts believe the stock should trade at a premium to the packaged food group, but that sounds crazy to me. I would avoid shares of Kraft Heinz until the company can find some revenue growth.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

More from Stocks

Inside Carnival's Mind Blowing New Horizon Cruise Ship (Video)

Inside Carnival's Mind Blowing New Horizon Cruise Ship (Video)

Neel Kashkari: The Heart of Our Financial System Is More Radioactive Than Ever

Neel Kashkari: The Heart of Our Financial System Is More Radioactive Than Ever

Finding Stocks Right for You: Cramer's 'Mad Money' Recap (Friday 8/25/18)

Finding Stocks Right for You: Cramer's 'Mad Money' Recap (Friday 8/25/18)

Flashback Friday: Amazon, Chip Stocks, Memorial Day

Flashback Friday: Amazon, Chip Stocks, Memorial Day

Week Ahead: Wall Street Looks to Jobs Report as North Korea Meeting Less Certain

Week Ahead: Wall Street Looks to Jobs Report as North Korea Meeting Less Certain