Credit Suisse: Kraft Heinz Could Be Facing 'Serious' Balance Sheet Issue

Beyond the SEC investigation Kraft Heinz Co KHC disclosed Thursday, one Wall Street analyst said Friday that concerns over the health of the food giant’s balance sheet is reason enough for investors to avoid the stock.

The Analyst

Credit Suisse analyst Robert Moscow reiterated an Underperform rating on Kraft Heinz and cut the price target from $42 to $33.

The Thesis

In addition to the target cut, Moscow also lowered the 2019 EPS estimate from $3.53 to $2.86. The latest disclosures are cause for skepticism of the food company's guidance for a return to earnings growth in 2020, he said.

The Kraft Heinz situation is far from a typical valuation reset, the analyst said, cautioning buyers of the dip. 

“The dividend cut, the $15.8-billion writedown 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." 

Investors should appreciate how much the $15.8 billion writedown will impact Kraft Heinz’s debt-to-equity ratio, a key metric that determines lenders’ willingness to provide credit, Moscow said. This phenomenon is likely at least partly responsible for the company’s higher-than-expected 2019 interest expense estimate, he said. 

If Kraft Heinz can't afford to pay its dividend, Moscow said the company's assertion that it is on the lookout for a meaningful acquisition seems dubious.

Regardless of the outcome of the SEC investigation, Moscow said investors should expect Kraft Heinz shares to trade at a valuation discount to its peer group until the market finds some clarity surrounding the company’s balance sheet.

Price Action

Kraft Heinz shares were down 27.46 percent at $34.95 at the time of publication Friday. 

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