This assignment asks you to use the techniques that you have learned in this course to evaluate a potential investment opportunity. Specifically, it asks you to use the data provided with this assignment to determine how much you would be willing to pay for one share of stock in The Kraft Heinz Company (KHC), and to offer an opinion on whether we should consider investing in this company at its current share price.

 The company's financial data has been provided for you in the spreadsheet that goes with this assignment;
 The spreadsheet also contains estimates for the company's 2021 earnings and dividends that you will be asked to use in your analysis;
 The writeup below also offers a bit of history and background on Kraft in order to help you form an opinion.
Please use the spreadsheet provided with this assignment to analysis, and write up your conclusions in a brief memo
Both the spreadsheet and memo should be turned in on D2L by Friday, March 11th at 11:59 pm.

Background
The Kraft Heinz Company (KHC) is the third-largest food & beverage company in North America and the fifth-largest food & beverage company in the world.
It owns a number of well known brands including: Kraft, Heinz, Oscar Meyer, Cracker Barrel, Lunchables, Kool Aid, Capri Sun, Philadelphia, Grey Poupon, Ore Ida, and Classico.
The company's earnings and profitability have deteriorated in recent years as the popularity of its products has begun to decline, however, and the share price has fallen by roughly 60% since 2017.

The company's management team is trying to address these problems, and hopes that their new strategic plan will increase both the company's earnings and profitability in the future. Investors remain skeptical, however, and are not currently predicting much of an improvement. Current estimates for 2021 are as follows:
 Expected Earnings Per Share (EPS) in 2021: $2.50
 Expected Return on Equity (ROE) in 2021: 6.0%
The company's dividend is expected to remain at $1.60 per share in 2021, although there is some hope that the company could increase this if earnings or profitability improve. By contrast, one of the company's closest competitors Mondelez International (MDLZ) has maintained an ROE of 12%-13% for the last 5 years and has been growing its dividend by more than 10% per year by successfully growing its business. It is clear that Kraft has the potential to improve its performance significantly if they can resolve the problems that have been holding them back.

Step 1: Analysis
In order to form an opinion of this stock, please take a moment to review the data provided in the spreadsheet:
 Simplified Financial Data for the years 2016-2020
 Estimates for 2021
 Key Ratios
Begin by making some observations:
 Can you see any trends in the data that might give us hope that this company has the
potential to increase its profitability in the future?
 Can you see any trends in its liquidity & solvency ratios that affect your opinion of
this company's risk?
 How do the P/E Ratio and Dividend Yield for this stock compare against those of its
competitor Mondelez International (MDLZ)?
What is your opinion of this company based on this analysis?

Step 2: Estimation
Now use the space provided at the bottom of the spreadsheet to estimate how much you would be willing to pay for this stock based on the estimates you've been given for 2021:
 Technique #1: Dividend-Based Valuation
How much should we be willing to pay for this company if we expect the dividend to be $1.60 in 2021 and need a rate of return of 7.0% on this investment? Note: you will need to calculate the sustainable growth rate of this company using the 2021 estimates in order to have all the information needed for this formula.
 Technique #2: Earnings-Based Valuation
How much should we be willing to pay for this company if we believe that it can trade at the same PE Ratio as its competitor Mondelez International (MDLZ)?
Note: Mondelez currently has a PE Ratio of 18.5 (data provided in spreadsheet).
Think about what you how to interpret these calculations: would you be willing to buy 1 share of The Kraft Heinz Company at $36.50 based on these estimates?

Step 3: Imagining Other Possibilities
Now go one step further and consider the possibility that the estimates you've been given for 2021 might increase if the company's strategic plan is effective.
 Possibility #1: the company could succeed in improving its profitability slightly, and will produce Earnings Per Share of $3.00 in 2021 if that occurs.
Note: this would bring its ROE up to 7.25%, still substantially below that of Mondelez International but nevertheless higher than most investors expect.
 Possibility #2: the company could succeed in bringing its profitability up to the
level of Mondelez International! While this is not likely to occur in 2021, it is an
interesting thought experiment to conduct.
If Kraft Heinz were to succeed in producing an ROE of 13% in 2021, it would be able
to priduce Earnings Per Share of roughly $5.40.
How does considering these possibilities affect your opinion about this investment?

Step 4: Drawing Conclusions
Look back through the analysis that you've done and think about what conclusions you
want to draw:
brief memo (no more than a single page) that outlines your conclusions, making sure to
address the following points:
 Would you be willing to invest in The Kraft Heinz Corporation (KHC) at its current
share price of $36.50 based on the analysis you've done here? Why, or why not?
 How did your analysis of the company's financial data affect your conclusion?
 How did your expectations for this company's dividend affect your conclusion?
 How did your expectations for this company's profitability affect your conclusion?
 How did comparing this company against Mondelez International (MDLZ) affect your
conclusions?
 What would you be hoping for if you invested in this stock, and what would you be
worried about?
 What further research could we do in order to produce a more informed investment
opinion on this stock?

Spreadsheet Data (Reference)

 

Transcribed Image Text:

KRAFT HEINZ CO Current Share Price Market Cap ($m) Current Shares Outstanding (m) INCOME STATEMENT ($m) Revenues Expenses Cost of Goods Sold Other Expenses Depreciation Total Expenses Earnings Before Interest & Taxes Interest Expense Pretax Profit Income Taxes Net Income Average Tax Rate Per Share Information Earnings Per Share Dividend Per Share Number of shares outstanding $36.50 44,567 1,221 2016 26,487 14,794 4,199 1,337 20,330 6,157 1,134 5,023 1,381 3,642 27.5% 2.99 2.35 1,217.0 Historical Financial Data 2017 26,232 15,169 3,263 1,036 19,468 6,764 1,234 5,530 (5,460) 10,990 -98.7% 9.02 2.45 1,218.0 2018 26,268 16,183 19,142 983 36,308 (10,040) 1,281 (11,321) (1,067) (10,254) 9.4% (8.41) 2.50 1,219.0 2019 24,977 15,788 4,173 994 20,955 4,022 1,361 2,661 728 1,933 27.4% 1.58 1.60 1,221.0 2020 26,185 16,045 6,871 969 23,885 2,300 1,270 1,030 669 361 65.0% 0.30 1.60 1,223.0 Estimates 2021 26,447 16,150 4,200 969 21,319 5,128 1,260 3,868 812 3,056 21.0% 2.50 1.60 1,221.0 KRAFT HEINZ CO Current Share Price Market Cap ($m) Current Shares Outstanding (m) INCOME STATEMENT ($m) Revenues Expenses Cost of Goods Sold Other Expenses Depreciation Total Expenses Earnings Before Interest & Taxes Interest Expense Pretax Profit Income Taxes Net Income Average Tax Rate Per Share Information Earnings Per Share Dividend Per Share Number of shares outstanding $36.50 44,567 1,221 2016 26,487 14,794 4,199 1,337 20,330 6,157 1,134 5,023 1,381 3,642 27.5% 2.99 2.35 1,217.0 Historical Financial Data 2017 26,232 15,169 3,263 1,036 19,468 6,764 1,234 5,530 (5,460) 10,990 -98.7% 9.02 2.45 1,218.0 2018 26,268 16,183 19,142 983 36,308 (10,040) 1,281 (11,321) (1,067) (10,254) 9.4% (8.41) 2.50 1,219.0 2019 24,977 15,788 4,173 994 20,955 4,022 1,361 2,661 728 1,933 27.4% 1.58 1.60 1,221.0 2020 26,185 16,045 6,871 969 23,885 2,300 1,270 1,030 669 361 65.0% 0.30 1.60 1,223.0 Estimates 2021 26,447 16,150 4,200 969 21,319 5,128 1,260 3,868 812 3,056 21.0% 2.50 1.60 1,221.0

Answer rating: 100% (QA)

Memo Subject Analysis and Recommendation on The Kraft Heinz Company KHC Stock Overview The Kraft Heinz Company KHC faces challenges in its profitability and market performance evident from a significa... View the full answer