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Kraft Heinz: Buffett's on Board
05/16/2016 7:00 am EST
Our latest recommendation was formed through the merger of Kraft Foods and H.J. Heinz in July 2015; the merger created the third-largest food and beverage company in North America, observes John Eade, analyst with Argus Research.
We are initiating coverage of The Kraft Heinz Company (KHC); we note that Heinz was previously owned by Berkshire Hathaway and Warren Buffet is now on the Kraft Heinz board.
Management expects the deal to generate annualized cost savings of $1.5 billion by the end of 2017.
The merger is also helping Kraft, which previously generated 98% of its sales in North America, to expand internationally by leveraging Heinz’ s strength in overseas markets.
Although sales have been sluggish in recent quarters, we expect improvement later in 2016 and in 2017 as Heinz and Kraft continue to integrate their operations and leverage their respective sales platforms.
We also expect the combined company to generate strong cost savings and above-peer-average earnings growth over time.
We have a favorable view of the Kraft Heinz merger, as the two companies should be able to leverage each other’s sales platforms and geographic strengths.
As such, we expect the combined company to achieve strong sales growth and to reach management’s target of $1.5 billion in annualized cost savings by 2017.
Our target price of $91 implies a multiple of 28-times our 2016 EPS estimate, slightly above the peer average. We believe that this premium valuation is warranted by the company’ s above- peer-average growth outlook over the next several years.
Based on the positive outlook, we believe that KHC shares are undervalued at 24-times our 2016 EPS estimate. This multiple is slightly below the peer average, despite Kraft Heinz’s stronger prospects for both sales growth and cost synergies.
Our target price implies a potential total return, including the dividend, of 18% from current levels.
By John Eade, Analyst with Argus Research
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