Kraft Heinz trades at $25.01 per share and has stayed right on track with the overall market, gaining 13.8% over the last six months. At the same time, the S&P 500 has returned 9.1%.

Is now the time to buy Kraft Heinz, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why do we think Kraft Heinz will underperform?

We’re passing on Kraft Heinz for now. Here are three reasons why there are better opportunities than KHC, plus one stock we’d rather own.

1. Demand slipping as sales volumes decline

Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful staples business as there’s a ceiling to what consumers will pay for everyday goods; they can always trade down to non-branded products if the branded versions are too expensive.

Kraft Heinz’s average quarterly sales volumes have shrunk by 3.5% over the last two years. This decrease isn’t ideal because the quantity demanded for consumer staples products is typically stable.

2. Operating losses sound the alarm

Operating margin is a key profitability metric because it accounts for all expenses enabling a business to operate smoothly, including marketing and advertising, IT systems, wages, and other administrative costs.

Unprofitable public companies are rare in the defensive consumer staples industry. Unfortunately, Kraft Heinz was one of them over the last two years as its high expenses contributed to an average operating margin of negative 20.1%.

3. Previous growth initiatives have lost money

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Kraft Heinz’s five-year average ROIC was negative 1.3%, meaning management lost money while trying to expand the business. Its returns were among the worst in the consumer staples sector.

Final judgment

We see the value of companies helping consumers, but in the case of Kraft Heinz, we’re out. That said, the stock currently trades at 11.8× forward P/E (or $25.01 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are more exciting stocks to buy at the moment. Let us point you toward one of Charlie Munger’s all-time favorite businesses.

Stocks we like more than Kraft Heinz

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