Is Kraft Heinz the Next Valeant?
Both Kraft Heinz & Valeant are roll ups of mature products backed by significant amounts of debt, a famous management team and a famous investor. Kraft Heinz is managed by renowned private equity firm 3G which snagged Warren Buffett for their most recent acquisition. Valeant was managed by McKinsey's former head of Healthcare Mike Pearson who had already become a legend in the industry and had a building name after him at Duke. Valeant sported Bill Ackman as their most well-known investor, but also had many other highly respected firms including John Paulson, Ruane Cuniff & Brave Warrior as very large investors. Lastly, both of these management teams did not come from their respective industry. They both worked for outside financial firms that dealt with these industries. Financial Engineering works when the products are stable or growing. But, when attrition rates start rising you run into trouble.
In the most recent quarter Kraft Heinz had $1.7 billion of EBITDA for a run rate of $6.8 billion with $40 billion of debt & liabilities. Valeant had forecast $7.5 billion of EBITDA in 2016 with $38 Billion of net debt and liabilities at the end of 2015, the year when the stock began its 95% peak to troth implosion.
The average Consumer Staple constituent of the S&P 500 had a 13x Enterprise Value to EBITDA multiple vs Kraft Heinz which trades at a little more than 11x. So by this metric the stock seems cheap. However, with declining operating margins, the $6.8 billion of EBITDA could easily fall, as it just did from the $8 billion Wall Street had expected prior to the last release.
Kraft Heinz is also raising prices on their products, however nowhere near as high as Valeant. That being the big differentiator. Valeant relied on price gauging that caused a national uproar whereas Kraft seeks price bumps in the mid single digits.
Does Kraft Heinz's management have the ability to turn around the financial performance? Or is Kraft Heinz caught up in a bigger storm? One where consumers just don't want processed and packaged foods anymore. A consumer that seeks to be moving towards a fresher dinning option doesn't bode well for the future of Kraft Heinz.
Written & Edited by The Rebellion Team