The Kraft Heinz Turnaround Story Gains Momentum Shares of Kraft Heinz (NASDAQ: KHC) wobbled in the wake of the Q1 earnings report despite better than expected results and an increase in the guidance. The results, as good...

Kraft Heinz Is Still A High-Yielding Value Play

Shares of Kraft Heinz (NASDAQ: KHC) wobbled in the wake of the Q1 earnings report despite better than expected results and an increase in the guidance. The results, as good as they are, are driven in large part by higher prices and only partially offset YOY declines attributable to tough comps and divestitures. The takeaway for us, however, is that the Kraft Heinz turnaround story remains intact. Not only that, the turnaround is gaining momentum and that is in line with the overall investment thesis. Kraft Heinz is a deep-value high-yielding consumer staple on the upswing. The stock bottomed after a series of negative events and now there is a reversal in play that we still see driving triple-digit gains for investors. The recent pullback in price action is a buying opportunity, if the price action falls any further the opportunity will only become more attractive.

Kraft Heinz Beats And Raises On Pricing Power

Kraft Heinz's Q1 results prove the success of the brand if only in terms of pricing power. The company was able to leverage a 9% increase in prices to drive revenue to $6.05 billion. This is down 5.3% from last year but includes divestitures and is 415 basis points better than expected so good news to us. Sales in most regions were down on a volume basis with Canada down the most at -5.5%. Those were offset by price increases that left organic sales, adjusted for divestiture, up mid to high single digits. Sales in the U.S. led with a gain of 7.2% followed by a 6.7% increase in the International market and a 2.5% increase in Canada. Divestitures cost the company 11.2% and FX headwinds another 1.1% of top-line results.

Moving down the report the news is equally mixed but ultimately bullish. The company's gross profit contracted 12.3% due to rising input costs but operating income and net income are both up. Operating income rose single digits while the net income rose by 37.5%. The bad news is that adjusted earnings fell on a YOY basis but even here there is a silver lining. The miss is attributed in large part to divestiture and higher commodity costs and the company is working to mitigate both. The earnings are also $0.07 better than expected and by a wider margin than revenue which means the company is gaining some leverage over inflation.

Turning to the guidance, it is more of the same with revenue expected to be higher than previously forecast and EBITDA to remain the same. The bottom line is that the revenue increase will be due to pricing increases but those increases are expected to at least maintain the EPS outlook if not the margin.

"We continue to build critical capabilities, greater corporate agility, and additional financial flexibility to address short-term turmoil while building our long-term advantage. We still have work to do, more opportunity ahead, and we remain confident in our ability to deliver our plan for the year as well as our long-term growth strategy," said Kraft Heinz CEO Miguel Patricio.

The Technical Outlook: Kraft Heinz Is In A Reversal

Shares of Kraft Heinz are pulling back in the wake of the earnings release but this is a textbook buying opportunity. Looking at the bigger picture, this move is part of a major reversal pattern that was confirmed and then reconfirmed late in 2021. Price action is now wrestling with resistance at the $44 to $45 level but we don't think it will last long. Assuming the market is able to continue the uptrend a move above $45 should come within the next few weeks or so. If not, price action may remain range-bound at these levels or even make a deeper pullback before moving higher. The caveat for the bears is that Kraft Heinz is a stable bluechip business that trades at 16X earnings and yields 3.78%. If there is a significant pullback we are confident value traders and income investors will be scooping up the shares.