Will Kraft Heinz (KHC) Disappoint Investors On Q1 Earnings?

The Kraft Heinz Company (NASDAQ:KHC) is scheduled to report first-quarter 2017 numbers on May 3, after the closing bell.

Last quarter, the company posted a positive earnings surprise of 4.60%.

The packaged food manufacturer delivered a positive earnings surprise in the trailing four quarters, the average surprise being 13.3%.

Let’s see how things are shaping up for this announcement.

Factors at Play

The company has been witnessing top-line weakness for the last several quarters. Soft spending by U.S. shoppers along with rapid change in consumer preferences and behavior are hurting the company’s categories. Kraft Heinz, like many other U.S. food producers, has been struggling due to the shift in consumer preference toward natural and organic ingredients over packaged and processed food.

Kraft Heinz’ organic sales inched up only by 0.3% in 2016 with developed markets – U.S. and Europe – recording negative organic sales growth. Net sales were $26.49 billion in 2016, down from pro forma sales of $27.45 billion.

This trend is likely to continue in the to-be-reported quarter. Management also warned that consumer trends are likely to remain challenged in both North America and Europe in the near term.

Again, the company’s 2017 outlook takes into account a 150–200 basis points (bps) headwind to sales in the first quarter given the shift in Easter and some U.S. inventory drawdowns.

Nonetheless, this Pittsburgh, PA-based packaged food company’s cost-savings initiatives have been giving a boost to the margins. These will continue to drive the bottom line in the to-be-reported quarter. Notably, adjusted EBITDA rose 3.3% to $1.937 billion in fourth-quarter 2016 backed by cost savings from restructuring activities and pricing gains in the U.S.

Kraft Heinz also stated that business reinvestment will remain elevated during the first half of 2017. Additionally, management continues to pursue best-in-class margins, but the phasing of incremental project savings will be weighted towards the second half.

Overall, for the first quarter, the Zacks Consensus Estimate for earnings is pegged at 85 cents, reflecting a 16.2% year-over-year increase. Meanwhile, our estimate for revenues is $6.46 billion, implying a 1.7% decline.

Earnings Whispers

Our proven model does not conclusively show a beat for Kraft Heinz this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. Unfortunately, that is not the case here as elaborated below.

Zacks ESP: The Earnings ESP is 0.00% as both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 85 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Kraft Heinz’s has a Zacks Rank #4 (Sell). Note that we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into an earnings announcement, especially when the company is seeing a negative estimate revision momentum.

The Kraft Heinz Company Price and EPS Surprise

The Kraft Heinz Company Price and EPS Surprise | The Kraft Heinz Company Quote

Stocks to Consider

Here are some consumer staples stocks that you may want to consider, as our model shows they have the right combination of elements to post earnings beats this quarter.

Newell Brands Inc. (NYSE:NWL) has an Earnings ESP of +6.90% and a Zacks Rank #3. The company is scheduled to report its quarterly numbers on May 8.

Dean Foods Company (NYSE:DF) has an Earnings ESP of +5.88% and a Zacks Rank #3. The company is scheduled to report earnings results on May 9.

Tyson Foods, Inc. (NYSE:TSN) has an Earnings ESP of +3.77% and a Zacks Rank #2. The company is scheduled to report its quarterly numbers on May 8.

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