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Kraft Heinz 'is a hot mess' and its stock could easily fall another 50%

Brian Sozzi
Editor-at-Large

It was another embarrassing earnings day for the veteran Kraft Heinz (KHC) and 3G Capital-bred executives hired by shareholders to steer its sinking ship full of packaged food.

Shares of the cheese and weiner maker cratered more than 14% Thursday following the release of its first half financials. First and second quarter sales badly missed analyst forecasts. While the company did manage to beat on earnings in both quarters, it clearly wasn’t enough to temper investors concerns on the future of the packaged-food giant. The company noted that first-half revenues dropped 4.8%, and operating income sank 55% from the same period last year.

“The level of decline we experienced in the first half of this year is nothing we should find acceptable moving forward,” CEO Miguel Patricio said in a statement. “We have significant work ahead of us to set our strategic priorities and change the trajectory of our business.”

The consumer staples company has been entangled in a web of drama this year, and its first-quarter financial results were delayed due to an U.S. Securities and Exchange Commission investigation into its accounting and procurement practices. In February, Kraft Heinz revealed a massive $15 billion write down of its Kraft and Oscar Mayer brands and slashed its dividend by 36% to 40 cents per share, from 62.5 cents per share.

Packages of Oscar Mayer Classic wieners are displayed. (Photo by Justin Sullivan/Getty Images)

Kraft Heinz revealed $1.4 billion in new impairment charges to unnamed food brands sold globally today. It also said it will delay its 10-Q filing with the SEC as it reviews its financial statements.

“Kraft Heinz is a hot mess,” Bokeh Capital Partners Kim Forrest said on Yahoo Finance’s The First Trade.

New CEO slow to clean up the mess

Patricio officially took over as CEO from predecessor Bernardo Hees on July 1. He previously served as the chief marketing officer at beer giant Anheuser-Busch InBev (BUD).

So far, the Kraft Heinz team has done little — at least in which investors could see — to clean up its hot mess besides taking enormous write-downs. Patricio has been slow to immediately announce the sale of certain underperforming brands to raise badly needed cash. He has also been slow to throw out an executive team of long-time Kraft Heinz executives — most coming from part owner and notorious cost-cutter 3G Capital — largely responsible for the botched financials and massive shareholder wealth destruction.

For instance, Kraft Heinz executive and 3G Capital by-product David Knopf joined the company as vice president of finance back in July 2015, according to his LinkedIn page. By October 2017, he was elevated to the chief financial officer position he continues to hold today. On paper, Knopf is the numbers person that has borne witness to the inflated asset values that are now being slashed.

Three of Kraft Heinz’s top 12 executives are 3G Capital disciples. Most of Kraft Heinz’s 11-member board of directors are either from 3G Capital or Berkshire Hathaway (BRK-ABRK-B).

Consumer analyst Howard Penney at Hedgeye Risk Management points out that with Warren Buffett’s Berkshire Hathaway and 3G Capital owning about 50% of Kraft Heinz, nothing is likely to change with leadership unless these financial titans want it to change.

Stock may drop even more

Kraft Heinz stock has shed an astounding 68% over the past two years under the existing leadership team. Forrest thinks the stock could easily fall another 50% based on the company’s awful financial affairs.

Others on Wall Street agree that Kraft Heinz is in serious trouble.

Guggenheim Securities consumer goods analyst Laurent Grandet says Patricio must take aggressive action if he wants to save the company. The company must invest in a range of $700 million to $800 million over two years to jump start sales growth, Grandet believes. Required investments include marketing to drive interest in core brands and in research and development to find the next hot product.

“In our view, Patricio faces a monumental challenge to put Kraft Heinz on a path to success as a standalone company,” Grandet says.

Penney believes the company will be “dismantled,” adding, “It’s hard to make these types of food mergers work.”

Heidi Chung contributed to this article.

Brian Sozzi is an editor-at-large and co-host of The First Trade at Yahoo Finance. Follow him on Twitter @BrianSozzi

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