Is The Kraft Heinz Recovery Story Dead On Arrival? Kraft Heinz's recovery story comes into question following weak guidance but the takeaways from the report may be more bullish than you think.

After years in the making, it may look like the Kraft Heinz (NASDAQ: KHC) recovery story is dead on arrival. When the company is set to begin delivering value to shareholders, it gives weak guidance but don't be fooled. The guidance is below the Marketbeat.com consensus estimate for earnings but comes with many caveats and mitigating factors. Among them is the likelihood that guidance is cautious.

Given the economic circumstances, CEOs making bold claims should be viewed with skepticism, and there are other factors in play as well. Not only has the company exhibited pricing power over the past 2 years, but organic growth is on the table, and margin expansion is expected in 2023.

So, to answer the question more directly, no, the recovery story in Kraft Heinz is not over; it's still in the early innings.

Kraft Heinz Wobbles On Mixed Results

The premarket action in Kraft is telling in that it shows the market is quite sure what to make of the results. The Q4 results were better than expected and the guidance was weak but more robust than it looked at face value. The Q4 revenue came in at $7.381 billion, up 10% from last year. The revenue is driven by a 15% increase in pricing that offset a low single-digit decline in volume. The revenue also beat the Marketbeat.com consensus figure by 200 basis points; that is not where the good news ends.

"The results were even more impressive considering the difficult operating environment, with record levels of inflation and supply chain disruptions, to which our teams responded with agility. I am very proud of the entire Kraft Heinz team for a strong year, while continuing to execute on our long-term strategy. We are confident that all our work thus far positions us well to accelerate profitable growth and generate attractive returns for our stockholders," says CEO Miguel Patricio.

On an organic basis, sales are up 10.4% showing strength in the core business. On a segment basis, all 3 operating segments saw at least 9.2% organic growth led by International at 14.3%. Regarding the margin, the gross profit increased by 9.3% showing some margin pressure but far less than expected.

The GAAP operating and net income increased by quadruple and triple digits, respectively due to 1-offs in the prior year related to restructuring efforts. The adjusted margin came in at +8.6% YOY and drove a gain in adjusted earnings. On the bottom line, the $0.85 in adjusted earnings is up 7.6% versus last year and beat the consensus by 900 basis points.

Guidance Is Weak, So What?

The guidance is strong is except for the comparison to the analyst consensus. The company is guiding for 4% to 6% organic revenue growth with adjusted EPS up 2% to 4%.

The EPS comparison included the extra week in 2022; on an ex-53rd week basis, the company expects gross margin improvement to help drive a 4% to 6% gain in earnings. The salient point here is that KHC is on track to grow despite headwinds and there is a chance it will outperform its guidance.

The takeaway for investors is that shares of KHC are still trading at less than 15X earnings and pay a healthy 4% dividend yield. This is more than double the broad market average, among the highest yields in the consumer staples sectors, and the stock is a deep value relative to its peers.

The chart shows the stock has support at the middle of its trading range. As long as that holds, this stock should continue sideways with an upward bias. If the market falls below the 150-day EMA at the middle of the range, it will most likely retest the bottom near $32.55.