Consolidation Isn't in the Cards for Kraft Heinz

Kraft Heinz isn't going to contribute to industry consolidation at this rate.
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Kraft Heinz (KHC) - Get Report has largely consoled investors and analysts with its promises of consolidation. That angle may have largely collapsed after Thursday evening's earnings.

Shares of the consumer staples stalwart are cratering on Friday, falling over 27% and wiping more than $15 billion off its market cap after delivering a triple whammy of bad earnings and guidance, a dividend cut, and the disclosure of an SEC investigation that will examine whether its books are bologna.

The beleaguered Warren Buffett holding's tumble has severely tempered the long held speculation on continued mergers and acquisitions will help buoy the consumer staples stock.

"Is M&A a sensible move for Kraft's playbook? At this stage, we don't think so," UBS analyst Steven Strycula said on Friday. "At this stage, we do not believe a large-scale deal is in KHC investors' best interest given margin gains have proven unsustainable and EBITDA erosion makes debt deleverage challenging."

Amidst the fallout, a merger between Campbell Soup Company (CPB) - Get Report and Kraft Heinz looks more like a Kmart and Sears-style deal than a synergistic opportunity. The shares in Campbell's are certainly reacting that way as well.

To be sure, the company is standing by its plans to poach peers, noting that its dividend cut and divestitures as keys to opening the opportunity.

"We are comfortable that this level of dividend can accommodate the two divestitures we've already announced as well as those we are currently considering," CFO David Knopf said. "These initiatives will accelerate the strengthening of an already solid balance sheet with a fully funded pension plan and continue to position Kraft Heinz for industry consolidation."

Analysts simply don't trust this management view any longer, as debt has remained consistently north of $30 billion in the past year and core brands like Oscar Mayer and Kraft continue to deteriorate.

"While industry consolidation led by Kraft Heinz has been an important component of our positive investment thesis up to this point, we do not believe the company is in a position to undertake consolidation given its desire to pursue more divestitures as well as its need to reduce its debt load to better support future consolidation opportunities," Stifel analyst Christopher Growe concluded. "The weak underlying performance of the business and the continued need to reinvest back into the business likely keeps the company from pursuing consolidation any time soon."

The removal of this thesis has prompted an avalanche of downgrades on Wall Street as many are wondering how long it will take for the stock to be reheated.

For an idea of just how low the stock could fall, check out Real money's technical analysis here.

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