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Feb. 15, 2017, 1:10 p.m. EST

Kraft Heinz earnings: Cost-cutting and deal synergies may carry more weight

Kraft Heinz expected to report adjusted earnings of 87 cents, up from a comparable 67 cents

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By Tomi Kilgore, MarketWatch


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Kraft Heinz Co. is scheduled to release its fourth-quarter report on Wednesday, after the stock market closes, with investors eyeing whether the processed food and beverages company’s results will help extend the stock’s rally toward record highs.

UBS analyst Steven Strycula said what is arguably more important than whether Kraft Heinz beats earnings expectations for a fifth-straight quarter, and can snap its two-quarter streak of revenue misses, is whether the company raises its target for cost cuts and merger synergies. Strycula said he believes the target will be raised to his projection of $1.7 billion, with potential upside to $2 billion, from the current target of $1.5 billion.

In November, the company /quotes/zigman/54335842/composite KHC -0.24%  , whose brands include Kraft Macaroni & Cheese, Heinz Ketchup, Jell-O, Oscar Mayer and Kool-Aid, said cost cuts helped boost third-quarter earnings per share above expectations.

Strycula said his analysis suggests that every $100 million in increased synergies from its acquisition of Heinz, which was completed in July 2015, adds about 6 cents to earnings per share.

Here is what else investors can expect from Wednesday’s report:

Earnings : Kraft Heinz is expected to report adjusted earnings of 87 cents a share, according to the average estimate of 16 analysts surveyed by FactSet. That is up from EPS of 67 cents in the same period a year ago. The FactSet EPS consensus has declined from 90 cents as of the end of the third quarter on Sept. 30.


FactSet

Kraft Heinz has beat the FactSet EPS consensus for the past four quarters, by an average of about nine cents a share, and for the past eight of nine quarters.

Revenue : The FactSet revenue consensus is $6.73 billion, down from $7.12 billion in the same quarter last year. As of Sept. 30, the FactSet consensus was for revenue of $6.88 billion.

Coke missed revenue expectations for the past two quarters, and for 11 of the past 14 quarters.

Stock price : Kraft Heinz’s stock rose 0.2% in midday trade Wednesday, putting it on track for a second-straight record close, and to stretch its win streak to seven sessions. The stock has run up 12% over the past three months.

In comparison, the SPDR Consumer Staples Select Sector exchange-traded fund /quotes/zigman/246134/composite XLP -0.13%  has advanced 6.3% over the past three months and the S&P 500 index /quotes/zigman/3870025/realtime SPX -0.08%  has climbed 7.5%.

Wall Street analysts are mostly bullish on Kraft Heinz, with the average rating of those surveyed by FactSet the equivalent of overweight. The average stock price target of $95.75 is 5.6% above current levels.

One well-known investor with a key interest in how Kraft Heinz’s stock reacts to the earnings report is billionaire Warren Buffett. His investment vehicle Berkshire Hathaway Inc. is the largest shareholder, with 325.6 million shares, or 26.8% of the shares outstanding, through the end of the third quarter, according to FactSet.

Don’t miss : These bets helped Warren Buffett become the biggest-gaining billionaire of 2016.

See also : Heinz passes on pricey Super Bowl ad, gives some employees a day off instead.

Other issues : UBS’s Strycula said Wednesday’s report should inspire confidence that sales trends are stabilizing, after U.S. scanner data trends showed improvement to a 1.5% decline from a 2.3% decline in the third quarter, as price deflation in some core categories was offset by a recovery in volume.

In the third quarter, sales declined 1.2% in the U.S., rose 2.0% in Canada, dropped 14.5% in Europe in Europe and increased 4.4% in the rest of the world, which includes Asia Pacific, Latin America, Russia, India, the Middle East and Africa.

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For the fourth quarter, the FactSet sales consensus for those geographic regions are as follows:

U.S.: $4.83 billion vs. $5.08 billion a year ago.

Canada: $617.0 million vs. $632.0 million a year ago.

Europe: $562.3 million vs. $640.0 million a year ago.

Rest of the world: $757.8 million vs. $770.0 million a year ago.

/quotes/zigman/54335842/composite
US : U.S.: Nasdaq
$ 79.82
-0.19 -0.24%
Volume: 2.36M
Nov. 22, 2017 4:00p
P/E Ratio
24.87
Dividend Yield
3.13%
Market Cap
$97.49 billion
Rev. per Employee
$639,317
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/quotes/zigman/246134/composite
US : U.S.: NYSE Arca
$ 54.81
-0.07 -0.13%
Volume: 10.17M
Nov. 22, 2017 8:00p
loading...
/quotes/zigman/3870025/realtime
US : S&P Base CME
2,597.08
-1.95 -0.08%
Volume: 1.60B
Nov. 22, 2017 4:39p
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Tomi Kilgore is MarketWatch's deputy investing and corporate news editor and is based in New York. You can follow him on Twitter @TomiKilgore.

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