Kraft Heinz Shares Unlikely To Soar Given Current Headwinds

The Kraft Heinz Company (NASDAQ:KHC) reported average returns over the past 15 years for the packaged foods industry.

Market-Implied Outlook For KHC/h2

I have analyzed put and call options at a range of strike prices, all expiring on Jan. 21, 2022, to generate the market-implied outlook for KHC for the 2.2-month period from now until that date. I have also calculated the market-implied outlook for the 7-month period from now until June 17, 2022 using options that expire on that date.

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

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

The market-implied outlook is generally symmetric, with comparable probabilities of positive and negative returns. Rather than having a single well-defined peak in probabilities, there are two small peaks at price returns of 0% and -3% for the next 2.2 months. The annualized volatility calculated from this distribution is 24.1%.

To make it easier to directly compare the probabilities of positive and negative return, 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.

From this view, it is evident that the probabilities of negative returns are consistently higher than for positive returns of the same magnitude. This is a slightly bearish outlook for price return.

Theory suggests that the market-implied outlook may be expected to have a negative bias because investors, in aggregate, tend to be risk averse and thus will be willing to overpay for put options. There is no way to robustly correct for this effect. Considering the potential for this bias, I conclude that the market-implied outlook to mid January is neutral with perhaps a slight bearish tilt.

The market-implied outlook to the middle of 2022, calculated using options that expire on June 17, 2022, is consistent with the shorter-term outlook. The probabilities of negative returns are slightly elevated (vs. positive returns) for the next 7 months. The annualized volatility calculated from this distribution is 26.5%.

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

The market-implied outlooks for KHC to Jan. 21, 2022 and to June 17, 2022 are similar and support a rating of neutral on KHC, perhaps with a slight negative tilt.

Summary/h2

KHC has not thrived since the merger, and current conditions are not going to help in the coming year. The Wall Street consensus outlook is neutral, albeit with a consensus 12-month price target that is 5.8% to 8.8% above the current level.

Combined with the dividend, the expected total return for the next year is 10.1% to 13.1%, for an average of 11.6%. As a rule of thumb for a buy rating, I want to see an expected 12-month total return that is at least half the expected volatility. Averaging the volatilities calculated from the market-implied outlooks, the expected volatility is 25.3%.

The average of the two consensus outlooks for return falls slightly short of the criterion for a buy. The market-implied outlooks for KHC to early- and mid-2022 are neutral. My final overall rating for KHC is maintained at neutral.