Categories
2019Q3 S&P500

Kraft Heinz increases prices but experiences negative organic growth of -1.1%

Kraft Heinz issued a press release on its third quarter results before the market opened. Organic growth was -1.6% in the US and -1.1% for the whole business.

Revenue and income by geographic and product segment

Revenue growth was impacted negatively by negative organic growth, currency headwinds and divestitures.

The natural cheese business being sold contributed approximately $560 million CAD (approximately $427 million USD at current FX rates) to Kraft Heinz’s net sales in 2017.

Press release from November 2018 announcing sale of Canadian natural cheese business to Parmalat.

The Kraft Heinz Company announced today the closing of the previously announced sale of its Canadian natural cheese business to Parmalat for a purchase price of $1.62 billion CAD (approximately $1.24 billion USD at current FX rates). The agreement includes Cracker Barrel, P’tit Québec, and aMOOza! brands in the Canadian market.

Press release from July 2nd announcing closing of the sale.

Gross margins and operating margins reached lows of 32.0% and 19.5% respectively, whereas SG&A excluding impairment losses was down from $803M to $762M.

The US experienced negative organic growth of -1.6% despite price growth of 1.5% and revenue in the US for the quarter was $4,361M.

EBITDA was down in all geographic segments, but EBITDA and EBITDA margins seem to have stabilised. Except in the Rest of the World segment, where increasing supply chain costs are causing damage to the EBITDA margin.

The product segment condiments and sauces as well as infant and nutrition both saw some of the biggest declines in the quarter.

CEO Miguel Patricio had the following comment regarding the segments.

While overall performance is improving, our numbers are still negative versus the prior year, and our performance remains uneven across categories and across geographies. This includes ongoing share and distribution losses within our natural cheese, cold cuts and coffee business in the United States, lower-than-anticipated promotional lifts in Canada, ongoing infant nutrition declines in both EMEA and China as well as increasing supply chain costs in our Rest of the World segment.

Kraft Heinz CEO Miguel Patricio on the 2019 third quarter earnings call.

Growth

Organic growth was -1.1% and -1.6% in the US despite growth in price of 1.5% in the US.

Debt and interest expenses

S&P in August affirmed the credit rating but revised the outlook from stable to negative. This followed the downgrade in June. S&P commented on adjusted leverage.

The negative outlook reflects the potential for a downgrade to speculative grade by mid-2021 if we believe Kraft Heinz cannot reduce adjusted leverage to below 4x. This could result if operating performance weakens further and we come to believe the strategic plan to be announced by the new CEO in early 2020 will be unsuccessful, including a failure to stabilize and reverse EBITDA declines, or an inability or unwillingness to reduce or eliminate the dividend or conduct meaningful deleveraging asset sales.

S&P press release from August

The adjusted leverage is still above 4x, but there are small signs of improvement following the deleveraging asset sale of the Canadian natural cheese business for approximately USD1.24B.

Interest expenses were up, which further stresses the need to deleverage.

Impairment charges and the balance sheet

Unlike the previous three quarters and the disastrous fourth quarter of 2018 there were no significant impairment charges and long term debt was reduced to $28,112M following the deleveraging asset sale in Canada.

Why is the share price up in the pre-market?

That the share price is up in the pre-market is probably a combination of valuation, the return of the CFO, the absence of impairment charges. Especially the valuation was attractive following the share price collapse.

And despite all of the bad news that landed in February it still remains a fact, that Kraft Heinz has some of the lowest costs and best margins in the industry.

And unlike the share price neither the sales nor the operating income have imploded. The business is intact despite the headwinds and the mountain of debt.

Media coverage

Reuters – Kraft Heinz investors cheer profit beat, plans to boost marketing

Bloomberg – Kraft Heinz Shares Rise as Delayed Comeback Materializes at Last

CNBC – Kraft Heinz stock jumps on earnings beat

Financial Times – Kraft Heinz still struggling with changing consumer tastes as sales dip

Previous media coverage

2019-10-23 Reuters – Kraft Heinz sees potential in baby food, will keep Plasmon

2019-09-17 CNBC – 3G Capital sells over 25 million shares of Kraft Heinz

2019-09-12 Reuters – Where’s the fake beef? Not at Kraft Heinz, investors worry

2019-08-26 Reuters – Kraft Heinz brings back former CFO after accounting missteps

2019-08-23 Bloomberg – Kraft Heinz Would Be Third-Largest Junk Issuer If Ratings Cut
2019-08-08 CNBC – Nightly Business Report
2019-06-25 CNBC – Warren Buffett denies tension with Kraft Heinz partner
2019-05-06 CNBC – Warren Buffett on Kraft Heinz restating earnings
2019-04-22 CNBC – Kraft Heinz names Miguel Patricio as new CEO
2019-02-25 CNBC – Warren Buffett on what he plans to do with his Kraft Heinz shares and 3G Capital
2019-02-22 CNBC – Morningstar’s Erin Lash dissects Kraft Heinz’s earnings miss
2019-02-22 CNBC – What went wrong with Kraft Heinz?
2018-05-07 CNBC – Warren Buffett: Changing Consumer Habits Hit Coke And Kraft Heinz
Categories
2019Q3 Breweries Europe

AB InBev increases prices in South Korea and Brazil and sees volume decline

AB InBev issued a press release on their quarterly results before the market opened.

The two most important headlines of the quarter were probably the listing of Budweiser APAC on the HKEx and implementation of price increases in South Korea and Brazil that drove volume declines.

Quarterly (YoY) organic volume growth (%).
CNBC Television – 30sep2019 – Budweiser APAC CEO speaks about the promise of the Asia market

Whereas revenue and revenue per hectolitre were up, volume was down and EBITDA margins contracted.

TTM revenue per segment
TTM volume per segment
TTM revenue per hectolitre

The proceeds from the listing of Budweiser APAC was used to reduce debt and AB InBev is on track to reduce the debt to 4 times normalized EBITDA before the end of the year; one year earlier than the prior guidance. Deleveraging to approximately 2 times EBITDA still remains the commitment.

Comparison of breweries

AB InBev continues to have the strongest operating margins in the industry because of their strong brands and their economies of scale. For example cost synergies of USD3.2B have been realised three years after the acquisition of SABMiller.

Interbrands 2019 report

Interbrands released their report on the 100 top ranked brands in the world on the 17th of October. AB InBev is featured on the list with two of their brands; Budweiser (#32) and the rapidly growing Corona (#79).

Media coverage

Reuters – AB InBev loses $13 billion in value as beer drinking slows in Brazil and South Korea

Bloomberg – Beer Giant AB InBev Loses $20 Billion in Market Value

CNN – Budweiser brewer hit by slumping sales in China

Financial Times – AB InBev scales back annual profit target after quarterly miss 

Bloomberg – The King of Beers Is in a Bind

WSJ – Budweiser Brewer Issues Profit Warning, Sending Shares Sharply Lower

2019-10-24 Bloomberg – Budweiser APAC Posts Sharp Profit Drop

2019-10-06 CNBC – Budweiser wants to take on China, the world’s largest beer market where local brews rule

2019-10-06 CNBC – Budweiser wants to take on China, the world’s largest beer market where local brews rule
Categories
2019Q3 S&P500

Amazon operating income drops and AWS margins contract

Amazon issued a press release on their third quarter results after the market closed.

Revenue increased by 24% to $70B, but operating income was down and margins for AWS and North America contracted.

In terms of cloud Microsoft Azure grew 59% YoY in the previous quarter. Microsoft is definitely catching up, and there might be a kink in the armour of Amazon.

Revenue from cloud (USDm)

Media coverage

Reuters – Amazon’s gloomy holiday forecast misses estimates, shares fall 7%

Bloomberg – Amazon’s One Sure Thing Starts to Look Shaky

Forbes – Why Amazon’s Costly One-Day Shipping Bet May Pay Big Dividends

New York Times – Amazon’s Profit Falls Sharply as Company Buys Growth

CNBC – Amazon clobbered after a miss on the bottom line and soft guidance

CNBC – Amazon’s cloud business reports 35% growth in the third quarter, trailing estimates

14Oct Morningstar – How Do You Value Amazon Heading Into 2020?

Categories
2019Q3

Chr. Hansen and Novozymes both tumble

The two Danish enzyme manufacturers Chr. Hansen and Novozymes both saw their share price tumble following third quarter earnings. Chr. Hansen released earnings on October 10th and Novozymes released earnings on October 23nd. This followed the October 9th profit warning from Novozymes. Chr. Hansen, which traded and continues to trade at higher multiples, fell from DKK 579.20 to 525.80 (-9.2%) on October 10th, whereas Novozymes didn’t budge. The figures below compare the expansion and contraction of multiples and operating margins of the two companies.

Chr. Hansen is still richly valued and might present itself as a short candidate. AQR Capital Management is one company with a short position in Chr. Hansen. Neither company seems attractively priced at current levels. Both companies suffer in similar segments and both are experiencing declining growth rates.

Novozymes

Novozymes

Chr. Hansen

Chr. Hansen

Media coverage

Oct10 Reuters – Shares in Denmark’s Chr. Hansen slump on lower sales outlook, weak demand

Oct23 JP Finans – Novozymes fastholder forventningerne til året efter nedjustering

Oct23 Børsen – Novozymes i stort kurshop: “Ansættelse af ny topchef er meget meget tæt på”

Oct15 Reuters – Novozymes’ CEO to step down as company looks to rejuvenate sales

Oct10 Bloomberg – `Credibility Problem’ at Novozymes Has CEO Explaining Next Steps

Categories
2019Q3 S&P500 Technology

Microsoft Cloud Strength Drives First Quarter Results

Microsoft issued a press release on its 2020 first quarter results after the markets closed with the following bullet points.

  • Revenue was $33.1 billion and increased 14%
  • Operating income was $12.7 billion and increased 27%
  • Net income was $10.7 billion and increased 21%
  • Diluted earnings per share was $1.38 and increased 21%

The figures below summarise the sales, profits and margins by each business segment.

Valuation

Despite increasing sales and expanding margins Microsoft continues to be extravagantly priced. Better choices in the space might be IBM, Oracle and Cisco.

Media coverage

Reuters – Microsoft forecasts cloud sales above expectations

Reuters – Microsoft’s cloud business slows, casts shadow over results

Bloomberg – Microsoft Rallies as Results Beat ‘Virtually Every Metric’

Bloomberg – Microsoft Sales, Profit Top Estimates on Cloud; Azure Slows

Categories
2019Q3 FMCG S&P500

P&G raises 2020 guidance amidst shining beauty and trimmed grooming

Procter & Gamble [$PG] issued a press release on its first quarter results prior to the market opening. The company raised its full year guidance. The share price jumped by 2.6% from $119.08 to a 52 week high of $122.18.

Financials

All segments except grooming displayed positive organic sales growth. The main contributors to top and bottom line growth is the beauty segment along with the fabric & home care segment.

Valuation

P&G has in 12 months gone up by more than 50% through expansion of multiples. As a consequence it is anything but cheap at current levels irrespective of having one of the best operating margins and currently displaying one of the best growth rates in the industry.

Media coverage

Reuters – P&G raises full-year forecast after beauty, healthcare brands drive profit beat

Bloomberg – P&G Gains After Posting Strong Sales Growth, Raising Outlook

Categories
2019Q3 Banks Financial

Bank OZK misses revenue and earnings estimates

Bank OZK [$OZK] issued a press release after the closing bell on its quarterly results accompanied by the following comment from the CEO George Gleason.

“We are very pleased to have once again delivered financial metrics among the best in the industry for the quarter just ended.  We continue to maintain our focus on our strong credit culture and consistent discipline, which are paramount in this interest rate and competitive environment.  Our excellent team of bankers have us well positioned for continued success as we remain focused on delivering long-term value for our shareholders.”

Total interest income was down QoQ, which is unusual for Bank OZK. As a consequence the net interest income before provision for loan losses was also down QoQ and YoY.

The stock price traded lower in the after hours. Is it then time to sell Bank OZK given the recent small kinks in the armour such as the provision for loan losses in the third quarter of 2018 and the reduced net interest income in the current third quarter of 2019? Probably not.

The bank is a dwarf in terms of assets compared to other regional banks that are members of the S&P500.

But the bank has some of the best metrics in terms of key metrics such as return on assets (ROA), return on equity (ROE) and net profit margin.

And the bank has in the past grown revenue at a faster pace than other banks.

And the bank has one of the absolutely lowest efficiency ratios in the industry.

On the other hand the bank dilutes shareholders and it might be advisable, if the bank gradually shifts the free cash flow to buybacks instead of repeatedly hiking the dividend every quarter and by ever greater increments.

All taken together it’s still one of the best banks out there and it’s currently trading at a discount in terms of for example the price-to-earnings (P/E) multiple.

Categories
2019Q3 S&P500

Netflix beats on profit but misses on number of new subscribers

Netflix issued a press release on its quarterly results after the closing bell.

In Q3, we grew to $5.2 billion in revenue, up 31% over the prior year, and operating income doubled to$1.0 billion. Paid net adds totaled 6.8m compared to our 7.0m forecast and prior year Q3 of 6.1m. As we’ve improved the variety, diversity and quality of our content slate, member engagement has grown, revenue has increased, and we’re able to further fund our content investment.

Financials

The number of memberships keeps increasing.

But the net addition of paid memberships is leveling off and so are the number of free trials.

Revenue has grown faster than the number of memberships, because the revenue per membership continues to go up for especially domestic streaming.

Profits are further boosted by the fact, that marketing expenses have mostly stayed flat. This has sent profit margins to all time highs.

Valuation

The share price of Netflix has had an incredible 10 year stint. As has the revenue and profits. But the share price might possibly have gotten ahead of itself. The multiples are not low and the stock still appears grossly overpriced in absolute and relative terms.

Media coverage

Reuters – Netflix shares jump as subscribers grow ahead of Disney, Apple attack

Bloomberg – Netflix Restores Faith Just Ahead of Offensive by Disney, Apple

Bloomberg – Netflix Approaches Critical Test of Its Viability

New York Times – ‘Stranger Things’ Helps Netflix Increase Subscribers

CNBC – Netflix to competition: Welcome! Your success will be our success

Categories
2019Q3 Healthcare Pharmaceuticals

Roche reports very strong sales growth in the first nine months of 2019 – outlook raised

Roche issued a press release on its nine month sales with the following headlines.

  • Group sales increase 10% at constant exchange rates and 9% in Swiss francs, due to new products
  • Pharmaceuticals Division sales up 12%, driven by high demand for recently launched medicines, mainly Ocrevus, Hemlibra, Tecentriq and Perjeta 
  • Diagnostics Division sales grow 4%, primarily due to its immunodiagnostic testing portfolio
  • Outlook raised again: Roche now expects sales to grow in the high-single digit range, at constant exchange rates, for 2019

Growth at Roche has recently accelerated due to many new product launches in the pharmaceuticals division.

Valuation

Roche is the largest pharmaceutical company in Europe, whether measured by market capitalisation, revenue or operating income.

Roche has one of the best operating margins among the European pharmaceutical companies.

But yet it is trading at lower multiples than many of its peers despite having an impressive product portfolio and pipeline with lots of new molecular entities (NMEs) in it.

Roche appears attractively valued despite the launch of biosimilars by Amgen of Avastin® and Herceptin® due to the extensive pipeline; for example risdiplam and satralizumab. It is also worth noting that all of the ten best selling drugs are monoclonal antibodies (mABs), for which generic biosimilars are not easily introduced, which offers some moat.

Media coverage

Reuters – Roche lifts 2019 sales view again as Chinese demand soars

Bloomberg – Roche Boosts Outlook for Third Time as New Drugs Surge

Categories
2019Q3 Healthcare Pharmaceuticals S&P500

J&J tops estimates

Johnson & Johnson [$JNJ] issued a press release before the market opened on its third quarter results with the following headlines:

  • Sales of $20.7 billion reflecting growth of 1.9%, operational growth of 3.2%* and adjusted operational growth of 5.2%*
  • EPS of $1.81 increased 25.7%; adjusted EPS of $2.12 increased 3.4%*
  • Company increasing Full Year Sales and EPS guidance due to strong performance

CEO Alex Gorsky issued the following statement:

“Our third-quarter results represent strong performance, driven by competitive underlying growth in Pharmaceuticals and Medical Devices, as well as continued optimization in our Consumer business. As we look ahead, we remain confident in the strength of our broad-based business model, which is fueled by our disciplined portfolio management, focus on transformational innovation and dedicated employees around the world who position us for success today and well into the future.”

Financials

The figures below summarise revenue, expenses, profits, margins and each segment. The revenue growth is driven by contact lenses (7.6%), interventional solutions (14.3%), beauty (8.1%) and the pharmaceutical segment and within it immunology (Stelara®, Tremfya®), neuroscience (Invega sustenna®) and oncology (Darzalex®, Imbruvica®).

Valuation and outlook

The share price of J&J has gone up in recent years, but the top line and bottom line have not quite followed suit. The company does not at all seem undervalued at current price levels despite the guidance being raised. Many lawsuits are looming and keeping the share price at check.

Media coverage

Nightly Business Report

2019Oct15 Reuters – Prescription drugs boost drives J&J forecasts higher, shares rise

2019Oct15 Bloomberg – Johnson & Johnson to `Grow Above Market’ in 2020, CFO Says

2019Oct15 Reuters – Missouri appeals court overturns $110 million Johnson & Johnson talc verdict

2019Oct15 Bloomberg – J&J Persuades Court to Throw Out $110 Million Talc Verdict

2019Oct15 Bloomberg – J&J Makes $4 Billion Opioid Offer as Distributors Seek Deal

2019Oct15 Bloomberg – J&J Says No Legal Reserves Needed Amid Wave of Lawsuits

2019Oct14 Bloomberg – J&J Faces 100,000 More Damage Claims After Taking $8 Billion Hit

2019Oct09 Reuters – Johnson & Johnson hit as jury awards “excessive” $8 bln in damages

2019Oct08 Reuters – Jury says J&J must pay $8 billion in case over male breast growth linked to Risperdal

2019Oct08 Bloomberg – J&J Unit Ordered to Pay $8 Billion Over Anti-Psychotic Drug

2019Oct07 Reuters – Oklahoma appeals size of $572 million award in J&J opioid case