We expect The Kraft Heinz Company KHC to beat expectations when it reports third-quarter 2015results on Nov 5 after the market closes. Last quarter, the company delivered a positive earnings surprise of 16.67%.
Kraft Heinz was formed out of the merger of packaged food company, Kraft Foods, and ketchup maker, H.J. Heinz Company.
Previously known as H.J. Heinz Holding Corporation, the company changed its name to Kraft Heinz post the merger on Jul 2. The deal was backed by Brazilian private equity firm, 3G Capital, and billionaire investor, Warren Buffet.
Kraft Heinz started trading on Jul 6, which was after the end of the second quarter, and therefore reported separate results for Kraft and Heinz. The third quarter should, therefore, be the first time that the company reports a combined result.
Let’s see how things are shaping up for this announcement.
Why a Likely Positive Surprise?
Our proven model shows that Kraft Heinz is likely to beat earnings this quarter because it has the right combination of two key ingredients.
Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +5.17%. This is very meaningful and a leading indicator of a likely positive earnings surprise for shares.
Zacks Rank: Kraft Heinz carries a Zacks Rank #3 (Hold).
Note that stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 have a significantly higher chance of beating earnings. The Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.
The combination of Kraft Heinz’s Zacks Rank #3 and +5.17% ESP makes us confident of an earnings beat.
Factors to Consider
Kraft has reported weak sales for the past few quarters due to volume losses associated with price increases and softness in certain categories resulting from the lack of innovation/brand building activities. Sales at both Kraft and Heinz have been suffering as a result of declining consumer demand for packaged food products.
However, profits were decent in the last quarter supported by lower commodity costs, mainly dairy and meat, lesser SG&A expenses due to advertising efficiency, and reduced manufacturing costs driven by improved productivity. We expect the trend to continue in the to-be-reported quarter as well.
As regards Heinz, while currency headwinds will hurt sales, pricing gains and improved performance in North America should boost results. Also, Heinz’s cost management efforts should support profit growth in the third quarter.
Stocks to Consider
Some stocks in the broader consumer staples sector that have both a positive Earnings ESP and a favorable Zacks Rank are:
Dean Foods Company DF, with an Earnings ESP of +4.00% and a Zacks Rank #3.
Campbell Soup Company CPB, with an Earnings ESP of +2.63% and a Zacks Rank #3.
Monster Beverage Corporation MNST, with an Earnings ESP of +1.23% and a Zacks Rank #3.
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