Kraft Heinz Co shares fell to their record low after the food giant announced a multi-billion dollar write-down on its marquee brands, raising concerns that years of rigorous cost cuts had eroded the value of its Kraft and Oscar Mayer products.
The announcement put the spotlight on Kraft’s stagnating growth and the changing tastes of consumers, who have been shunning older, established brands for newer hipper products, cheaper private label brands and non-processed food.
The shares fell as much 28 percent to hit a low of $34.51 by midday, wiping off about $17 billion from the company’s market value.
Shares of rivals also fell, with General Mills, Conagra Brands Inc, Unilever and Nestle SA all down between 3 percent and 6 percent.
Kraft Heinz, majority owned by Brazil’s 3G Capital and Warren Buffett’s Berkshire Hathaway Inc, has been combating higher transportation and commodity costs by tightening overall expenses. But that has come at a price.
“Investors for years have asked if 3G’s extreme belt-tightening model ultimately would result in brand equity erosion,” JPMorgan analyst Ken Goldman said.
“We think the answer arguably came yesterday in the form of a $15 billion intangible asset write-down for the Kraft and Oscar Mayer brands,” said Goldman, who cut his rating to “neutral” from “overweight”.
Kraft also hit investors with the announcement of a regulatory probe, a chop in its dividend and a quarterly loss on Thursday.
Heinz merged with Kraft in 2015 in a deal engineered by 3G, and under its stewardship carried out extreme cost cuts that risked hurting the company’s top line by stifling investment in innovation and marketing.
The Brazilian firm was praised for using a strategy called zero-based budgeting or ZBB - where managers must justify all expenses, from pencils to forklifts - that helped boost Kraft Heinz’s margins to the best amongst its peers.
Analysts now doubt if 3G’s model is effective, given that the company’s margins before interest and taxes fell to 23.2 percent in 2018 from 27.2 percent in 2015.
“Part of the reason the stock will suffer...is that we see the 3G model as highly dependent on deal-making and synergy realization and at some point having best-in-class margins doesn’t matter if the sales growth doesn’t eventually come,” Guggenheim Partners’ analyst Laurent Grandet said in a note.
“Kraft Heinz results confirmed all our worst fears – plus more,” Grandet said in a note.
Stifel downgraded the stock to “hold” from “buy” and more than halved its price target to $35, well below the current median target of $52.
Credit Suisse cut its price target by $9 to $33, making it the lowest on Wall Street.
“This is not your typical “reset the base and everything will be fine” story,” Credit Suisse analyst Robert Moskow wrote.
“The dividend cut, the write-down of the Kraft and Oscar Mayer trademarks, and the guidance for further divestitures demonstrate the hallmarks of a company that has a serious balance sheet problem,” Moskow said.
The news also hit the company’s bond investors. Kraft Heinz’s nearly $31 billion of bonds were among the most heavily traded paper in the U.S. corporate debt market on Friday morning, according to MarketAxess, and yields on several of their largest bonds shot higher and their prices dropped by a full point or more.
Spreads on their bonds, or the premium demanded by investors as compensation for holding Kraft paper over safer U.S. Treasury securities, widened by the most ever across a range of the company’s bonds.