Morningstar - Report 636d1778e26a17cb57991bce KHC

Morningstar Equity Analyst Report | Report as of 16 Sep 2023 04:27, UTC | Reporting Currency: USD | Trading Currency: USD
| Exchange: NASDAQ - ALL MARKETS Page 1 of 21
The Kraft Heinz Co KHC QQQQQ 15 Sep 2023 21:18, UTC
Last Price Fair Value Estimate Price/FVE Market Cap Economic MoatTM Equity Style Box Uncertainty Capital Allocation ESG Risk Rating Assessment1
33.45 USD 53.00 USD 0.63 41.48 USD Bil None 4 Mid Value Medium Standard ;;;;;
15 Sep 2023 9 May 2023 18:41, UTC 14 Sep 2023 6 Sep 2023 05:00, UTC
Price vs. Fair Value
Fair Value: 53.00

9 May 2023 18:41, UTC
200
Last Close: 33.45
150 Over Valued
Under Valued
100
50
0
2018 2019 2020 2021 2022 YTD
0.72 0.64 0.72 0.72 0.78 0.63 Price/Fair Value
-41.44 -21.63 12.85 8.19 17.86 -14.89 Total Return %
Morningstar Rating
Total Return % as of 15 Sep 2023. Last Close as of 15 Sep 2023. Fair Value as of 9 May 2023 18:41, UTC.
Contents
Business Description Even as Competition Heats Up, Kraft Heinz Is Anchored in
Business Strategy & Outlook (24 Aug 2023)
Bulls Say / Bears Say (24 Aug 2023) Judiciously Investing for the Long Term
Economic Moat (24 Aug 2023)
Fair Value and Profit Drivers (24 Aug 2023)
Business Strategy & Outlook Erin Lash, CFA, Sector Director, 24 Aug 2023
Risk and Uncertainty (24 Aug 2023)
Kraft Heinz benefited from consumers’ penchant for eating at home during the pandemic, with 85% of
Capital Allocation (24 Aug 2023)
Analyst Notes Archive its sales driven through the retail channel. But we attribute recent performance to the prudence of its
Financials revamped road map (based on household penetration and repeat purchase metrics) rather than merely
ESG Risk a byproduct of the macro and competitive backdrop. CEO Miguel Patricio has charged the firm to pursue
Appendix
efficiencies that prove lasting, elevate brand spending (marketing and product innovation), enhance
Research Methodology for Valuing Companies
capabilities (category management and e-commerce), and leverage its scale to more nimbly respond to
Important Disclosure
changing market conditions, which we perceive as prudent.
The conduct of Morningstar’s analysts is governed by Code of Ethics/Code of
Conduct Policy, Personal Security Trading Policy (or an equivalent of), and
Investment Research Policy. For information regarding conflicts of interest, please We think Kraft Heinz has abandoned its prior mantra of inflating profits at any cost in favor of
visit: http://global.morningstar.com/equitydisclosures.
consistently driving profitable growth. While the firm intends to realize $2.5 billion in efficiency savings
The primary analyst covering this company does not own its stock.
through 2027 (up from $2 billion prior and including $450 million unlocked in fiscal 2022), it appears to
The ESG Risk Rating Assessment is a representation of Sustainalytics’ ESG Risk
1
Rating. be doing so as a way to free up resources to reinvest in its product mix rather than bolster profits. And
even as stepped-up angst from broad-based inflationary headwinds (commodities, labor, packaging, and
logistics, with a mid- to high-single-digit hit expected in fiscal 2023, on top of double-digit constraints in
each of the past two years) is beleaguering its consumer product peers, Kraft Heinz appears to be taking
these pressures in stride. Beyond looking to surgically extract inefficiencies, it is also selectively raising
prices (and could continue to do so). But it isn't relenting on its focus to more effectively fuel marketing
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Morningstar Equity Analyst Report | Report as of 16 Sep 2023 04:27, UTC | Reporting Currency: USD | Trading Currency: USD | Exchange: NASDAQ - ALL MARKETS Page 2 of 21
Sector Industry
s Consumer Defensive Packaged Foods spending, targeting a 30% increase in marketing between fiscal 2020 and 2024, which we think stands
to support its brand mix and its retail relationships. From our vantage point, these efforts are being
Business Description
In July 2015, Kraft merged with Heinz to create the third- aided by its decision to narrow its stock-keeping unit count, which was down 20% in North America the
largest food and beverage manufacturer in North past couple of years. When taken together, our forecast calls for research, development, and marketing
America behind PepsiCo and Nestle and the fifth-largest to amount to 6% of sales annually on average the next 10 years, or around $1.9 billion, up from a 4.5%
player in the world. Beyond its namesake brands, the
average over the last five years.
combined firm's portfolio includes Oscar Mayer,
Velveeta, and Philadelphia. While the retail channel
Bulls Say Erin Lash, CFA, Sector Director, 24 Aug 2023
drives around 85% of its total sales, the firm operates a
u Tempered exposure to private label (11% now versus 17% in 2019) and enhanced agility in responding
growing presence in the foodservice arena. Outside
North America, Kraft Heinz's global reach counts a to consumer trends should blunt any lasting downdraft in Kraft Heinz's volume.
distribution network in Europe and emerging markets u We see Kraft Heinz's decision to organize the business around six consumer need states as affording the
that drives 20%-25% of its consolidated sales base, as its opportunity to more effectively tailor its offerings to evolving consumer trends.
products are sold in more than 190 countries and
u By focusing its manufacturing assets on its highest-turning products and enlisting higher-cost
territories.
comanufacturers at the onset of COVID-19, we think Kraft Heinz was able to efficiently mend its
fractured retail relationships.
Bears Say Erin Lash, CFA, Sector Director, 24 Aug 2023

u Inflation (stemming from commodities, labor, packaging, and logistics) has been running rampant of
late, and it's possible Kraft Heinz will eventually struggle to pass the hit on to consumers without a more
pronounced contraction in volume.
u With supply chain disruptions being rectified and consumers altering spending as pressures on their
pocketbooks become more acute, we think competitive intensity could resurface.

u If Kraft Heinz opts to beef up its debt load, it could struggle to reinvest in the business while returning
cash to shareholders.
Economic Moat Erin Lash, CFA, Sector Director, 24 Aug 2023

We don't believe that Kraft Heinz's intangible assets or scale warrant an economic moat. Returns on
invested capital (including goodwill) have languished, falling short of our 7% weighted average cost of
capital each of the past five years. We attribute these lackluster returns to the prior management team's
decision to prioritize near-term cash flow at the expense of protecting its long-term competitive position.
Since the tie-up in 2015, Kraft Heinz has operated as the third-largest food and beverage firm in North
America behind PepsiCo and Nestle, with around $19 billion in sales on its home turf in 2022 and just
north of $26 billion on a consolidated global basis. The hallmark of the combination of Kraft and Heinz
had been its ability to extract a significant degree of costs from its operations, with operating margins
that have hovered in the low 20s, materially above the mid- to high teens its peers boast. We don't think
this level of profitability evidences a scale edge, though, but rather had been derived as the firm
refrained from investing meaningful resources behind its brands. Investments in research, development,
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Competitors
The Kraft Heinz Co KHC Campbell Soup Co CPB General Mills Inc GIS Kellogg Co K
Fair Value Fair Value Fair Value Fair Value

53.00 61.00 78.00 84.00
Uncertainty : Medium Uncertainty : Medium Uncertainty : Low Uncertainty : Medium
Last Close
Last Close Last Close
Last Close 65.85
33.45 43.04 59.96
Economic Moat None Wide Narrow Wide

Currency USD USD USD USD
Fair Value 53.00 9 May 2023 18:41, UTC 61.00 26 Jul 2023 20:39, UTC 78.00 6 Apr 2023 18:08, UTC 84.00 29 Mar 2023 16:11, UTC
1-Star Price 71.55 82.35 97.50 113.40
5-Star Price 37.10 42.70 62.40 58.80
Significantly 15 Sep Under Valued 15 Sep 2023 Under Valued 15 Sep 2023 Under Valued 15 Sep 2023
Assessment
Undervalued 2023
Morningstar Rating QQQQQ15 Sep 2023 21:18, UTC QQQQ15 Sep 2023 21:18, UTC QQQQ15 Sep 2023 21:18, UTC QQQQ15 Sep 2023 21:18, UTC
Analyst Erin Lash, Sector Director Erin Lash, Sector Director Jaime M. Katz, Senior Equity Analyst Erin Lash, Sector Director
Capital Allocation Standard Standard Standard Standard
Price/Fair Value 0.63 0.71 0.84 0.71
Price/Sales 1.51 1.38 1.97 1.31
Price/Book 0.82 3.50 3.66 5.18
Price/Earning 13.07 15.10 15.28 23.98
Dividend Yield 4.78% 3.44% 3.36% 3.95%
Market Cap 41.48 Bil 12.96 Bil 38.57 Bil 20.51 Bil
52-Week Range 32.42—42.80 40.76—57.78 64.70—90.89 58.82—77.17
Investment Style Mid Value Mid Value Mid Core Mid Value
and marketing amounted to just 4%-5% of sales annually at Kraft Heinz, generally lagging the mid- to
high-single-digit levels at peers.
Further, we don't believe Kraft Heinz enjoys significant pricing power. In its U.S. segment (more than
70% of its consolidated sales base), its volume eroded more than 1% on average in the five years before
the pandemic, despite price holding about flat over the same time horizon. Further, some of the
categories in which it competes--like packaged meats and cheeses, categories that account for around
one quarter of its consolidated base--have become commodified, as consumers tend to consider price
rather than brand when making purchase decisions. This is a particular challenge given that switching
costs for the end consumer are essentially nonexistent in the consumer product industry. We
acknowledge that volumes have been holding up better than history would suggest across the industry
more recently, but with the amount of pressure consumers are contending with (higher prices
throughout the grocery store and at the pump, combined with rising interest rates), we don't believe
that such resilience will persist. And despite greater openness to parting ways with less profitable
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(noncore) brands and businesses (like Planters and natural cheese to funnel additional resources behind
its highest-return opportunities), we aren't convinced these actions will manifest in a durable
improvement in its competitive position.
Given that center-of-the-store grocery categories, such as simple meals and baking offerings, had been
losing out to consumers' desire to shop the perimeter of the store in search of healthier fare (before the
onset of COVID-19), we think that maintaining--or even increasing--brand spending will be crucial in
holding brand awareness and securing a competitive edge. We view this as even more essential now,
relative to several years ago, in light of the growing adoption of the e-commerce channel, which has
enabled smaller, niche operators to gain a leg up in amassing proof of concept, as retailers aren't
beholden to allocate inherently limited physical shelf space to unproven suppliers. Further, because of
the intensely competitive environment in which it plays (going to bat against other branded peers,
lower-priced private-label offerings, and smaller, niche operators), we believe Kraft Heinz will boost its
brand spending in order to stave off market share losses, even though this spending stands to hamper
margin gains over time (if not fueled by efficiency savings). But if this plays out and the firm's sales and
share exhibit stabilization, we would consider re-evaluating our moat rating.
Fair Value and Profit Drivers Erin Lash, CFA, Sector Director, 24 Aug 2023
We're holding the line on our $53 fair value estimate for Kraft Heinz after second-quarter results. Our
valuation implies a fiscal 2024 enterprise value/adjusted EBITDA multiple of around 14 times.
Inflationary headwinds show little sign of cooling, as management continues to call for a mid- to high-
single-digit bump in the current year (on top of two consecutive years of double-digit pressures). While
consumers could tighten their purse strings in the face of rising costs, more muted exposure to private
label (at just 11% now, versus 17% in 2019, materially below the high teens to low 20s across the U.S.
food and beverage sphere) and enhanced agility in aligning its mix with evolving consumer trends
should blunt any lasting downdraft in Kraft Heinz’s margins. As such, we forecast gross margin in the
low 30s again this year before returning to the mid-30s over the next few years, a level that slightly
outpaces what the firm has historically boasted.
Even with these challenges, we’re encouraged that the firm continues to invest behind its brands, with
a focus on research as well as marketing. We believe its ability to reliably deliver product to store
shelves even as supply chains were disrupted is helping to buoy the company's previously impaired
relationships with its retail partners. But to ensure this persists over a longer horizon, we think the firm
will need to keep its foot on the gas. We forecast marketing, research, and development to expand to
6% of sales in the aggregate over our 10-year forecast versus less than 5% the last few years.
Consumers are venturing beyond their homes for food consumption, and competitive intensity is unlikely
to lie idle (once supply/demand imbalances are in the rearview), the combination of which stands to
temper Kraft Heinz's sales trajectory. However, we think the extent to which Kraft Heinz is retaining the
ß
households that flocked to purchase its offerings the past few years is evident as organic sales have
consistently run at a mid-single-digit rate above prepandemic levels on its home turf the past few
quarters. We think that with a strategic playbook centered on upping the ante on brand spending and
bolstering its category management and e-commerce capabilities, the firm could continue to eke out
top-line gains. Taking this all together underpins our longer-term forecast for 2% average annual sales
growth and operating margin holding in the low 20s, which aligns with management's long-term targets
for 2%-3% organic sales growth and 6%-8% adjusted EPS growth.
Risk and Uncertainty Erin Lash, CFA, Sector Director, 24 Aug 2023
When considering Kraft Heinz's ability to counter competitive and macro pressures, as well as the range
of return outcomes embedded within our star rating system, we surmise that the firm merits a Medium
Uncertainty Rating. Following changes in its executive ranks in mid-2019, Kraft Heinz has orchestrated
significant strategic changes (centered on upping the ante on brand spending, bolstering its category
management and e-commerce capabilities, and lowering leverage levels) that we think position it to
withstand intense competitive angst.
Inflation stemming from logistics, labor, raw materials, and packaging has yet to be stifled;
management now expects a high-single-digit hit from higher input costs in fiscal 2023, on top of double-
digit pressures each of the past two years. But we contend Kraft Heinz is more aptly suited to combat
these pressures. While we acknowledge consumers could tighten their purse strings to weather rising
costs, more muted exposure to private label (at just 11% now, versus 17% in 2019, materially below the
high-teens to low-20s across the U.S. food and beverage sphere) and enhanced agility in aligning its mix
with evolving consumer trends should blunt any lasting downdraft in Kraft Heinz's margins. Further, we
don't surmise elevating prices is its singular ploy to dull the impact. Rather, we think Kraft Heinz now
sees the value in surgically, versus blindly, extracting inefficiencies (unearthing $450 million in savings
in fiscal 2022, with a target for gross productivity savings of $2.5 billion through fiscal 2027), which we
view as prudent.
While we don't see risks stemming from environmental, social, and governance as particularly germane,
Kraft Heinz could be forced to recall its fare if quality standards fall short. In addition, the firm could
come under increased regulatory oversight if authorities laser in on curbing obesity.
Capital Allocation Erin Lash, CFA, Sector Director, 24 Aug 2023

We assign Kraft Heinz a Standard Capital Allocation Rating, underpinned by the prudent steps taken
under CEO Miguel Patricio to shore up its balance sheet. In addition, we believe its investments more
recently are proving fair and distributions appropriate. This is a shift from the priorities of past
management, where near-term cash flows and profitability trumped investments in the firm's long-term
competitive position, as it failed to direct sufficient resources to support intangible assets.
ß
As Kraft Heinz was still reeling from the unfavorable headlines resulting from its fourth-quarter 2018
earnings announcement surrounding a profit contraction, a Securities and Exchange Commission
investigation of its procurement accounting (which has since been put to rest), and a reduction in its
quarterly dividend to $0.40 per share from $0.625, it announced a change in leadership. Bernardo Hess
was replaced as CEO at the end of June 2019 by Patricio, who had spent the prior two decades at wide-
moat Anheuser-Busch InBev, serving as president of Asia from 2008 to 2012 and chief marketing officer
from 2012 to 2018. In a shift from its past organizational structure, Patricio does not have an affiliation
with 3G Capital, which acquired Heinz in 2013 and orchestrated the merger between Kraft and Heinz in
2015. Based on his rhetoric since assuming the top spot, we think he has been working to instill a larger
commitment to reigniting sales by fueling further investments behind the firm's brands, with a focus on
innovation that aligns with evolving consumer trends and marketing its fare. This is in line with our
expectation for Kraft Heinz’s brand spending to tick up to around 6% over our 10-year explicit forecast
from less than 5% on average over the past three years. Although Kraft Heinz under the ownership of
3G epitomized extensive cost-cutting, such actions haven't persisted in a similar fashion, providing
credence to Patricio's initial sentiment that he had (and, we suspect, continues to have) the green light
from the board to implement significant strategic change as a means to drive consistent and profitable
growth.
And now, after nearly five years at the helm, Patricio is poised to step down in January 2024, with
Carlos Abrams-Rivera—who joined the firm in 2020 and currently serves as executive vice president
and president of North America—set to take the reins. Patricio will continue to serve as executive
chairman to ensure a smooth transition. Abrams-Rivera boasts an extensive career in the consumer
packaged goods industry, with time spent at wide-moats Campbell Soup and Mondelez, and thus strikes
us as a sound fit for the role. In our view, he has been intimately involved in scripting and executing the
firm’s strategic playbook (anchored in upping the ante on brand spending and bolstering its category
management and e-commerce capabilities), and as such, we don’t expect Kraft Heinz will veer off its
current course under his watch.
Beyond its priorities for cash to recharge its existing operations, a significant amount of attention
continues to center on Kraft Heinz’s appetite for a deal and where its interests might lie, particularly
after its thwarted bid for Unilever in early 2017. However, building on the previously announced sales of
three Indian brands and its natural cheese business in Canada (for around $1.8 billion in the aggregate),
Kraft Heinz more recently sold its natural, grated, cultured, and specialty cheese business (to Groupe
Lactalis for $3.2 billion) and its nut business, including the Planters brand (to narrow-moat Hormel for
$3.35 billion). We don't think either transaction was inked at fire-sale prices. Kraft Heinz garnered a
respectable 1.8 times trailing 12-month sales and 12 times adjusted EBITDA for its natural cheese
operations. Its nut business amassed a generous 3 times fiscal 2020 sales and 15 times adjusted
EBITDA. We expect management could continue parting ways with less profitable brands. We think
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these endeavors would serve to focus resources (both financial and personnel) on the highest-return
opportunities while also affording the opportunity to reduce the debt load with the proceeds from these
initiatives. Net debt/adjusted EBITDA stood at 3.2 times at the end of fiscal 2022, down from 4.4 times
at the end of 2019. We think aims for leverage to hover in the low-single digits are reasonable.
Despite its intent to reduce leverage and reinvest in the business, we don't believe Kraft Heinz intends
to shirk on returning cash to shareholders. We forecast mid-single-digit annual increases in the
dividend, implying a payout ratio of 50%-60% over our 10-year explicit forecast.
Analyst Notes Archive
Kraft Heinz: Even With a Pending C-Suite Switch, Strategic Sea Change Unlikely; Shares Attractive
Erin Lash, CFA, Sector Director, 14 Aug 2023
After nearly five years at the helm, no-moat Kraft Heinz announced CEO Miguel Patricio will step down
in January, with Carlos Abrams-Rivera—who joined the firm in 2020 and currently serves as executive
vice president and president of North America—poised to take the reins. Patricio will continue to serve
as executive chairman to ensure a smooth transition. Abrams-Rivera boasts an extensive career in the
consumer packaged goods industry, with time spent at wide-moats Campbell Soup and Mondelez, and
strikes us as a sound fit for the role. And because he has been intimately involved in scripting and
executing the firm’s strategic playbook (anchored in upping the ante on brand spending and bolstering
its category management and e-commerce capabilities), we don’t expect Kraft Heinz will veer off its
current course under his watch. Our Standard capital allocation rating remains in place.
Even against macro upheaval, the strides made since Patricio took the helm are quite noteworthy. Kraft
Heinz proactively enhanced its financial flexibility, with net debt/EBITDA hovering in the low-3 times
range, down from north of 4 times in 2019. We believe this affords the firm the ability to reinvest in its
operations and selectively pursue acquisitions while bolstering shareholder returns, embodied by our
forecast for mid-single-digit percentage increases in its dividend each year beginning in fiscal 2023,
implying a payout ratio of 50%-60%. He has instilled enhanced operational agility in aligning its mix with
evolving consumer trends that we think should unlock modest low-single-digit sales growth while
holding margins. The success of these efforts is evident in organic sales that are running more than 5%
above prepandemic levels.
At around a 35% discount to our $53 fair value estimate (and a nearly 4% dividend yield), we think
investors would be wise to stock up on the name.
(Aug. 15, 2023): This note has been updated to correct the discount to our fair value estimate to 35%.
Kraft Heinz Earnings: Price Increases Buoy Sales and Margins, but Market Share Languishes Erin
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Lash, CFA, Sector Director, 2 Aug 2023

Despite headwinds, sales continued to climb in no-moat Kraft Heinz’s second quarter, up 4% on an
organic basis on top of 10% growth a year ago. Adjusted gross and operating margins expanded 180
and 90 basis points, respectively, to 33.3% and 20.6%. Pricing was a major driver of the performance,
serving as an 11% benefit to the top line. However, we don’t think management is focused only on
raising prices. Rather, we attribute recent marks to the strategic playbook that CEO Miguel Patricio
crafted upon taking the helm in 2019, anchored in extracting inefficiencies from the business (with a
target of unlocking $500 million per year) to juice brand investments. We view this course as sound and
believe it has enabled Kraft Heinz to regain acclaim from retailers and consumers alike after years of
underinvestment and executional missteps.
The picture isn’t entirely rosy, as Kraft Heinz lost 50 basis points of share in North America in the quarter
to other branded operators that stepped up promotions, though private-label share held flat in its
categories. With inflation moderating, supply chain disruptions being rectified, and consumers altering
spending as pressures on their pocketbooks become more acute, we anticipated the competitive
environment would intensify after years of lying idle. But we don’t believe Kraft Heinz is sitting still. We
think it will continue putting resources behind consumer-valued innovation (up 10% in the quarter) and
marketing (up 23%) while also enhancing its own capabilities to boost the agility of its operations. This
aligns with our forecast for the firm to spend around 6% of sales, or $1.9 billion, annually on research,
development, and marketing through fiscal 2032.
Taking this together, we see little to warrant amending our $53 fair value estimate. With the shares
trading at a 30% discount to our intrinsic valuation and a 4%-plus dividend yield, we think investors
should stock up.
Kraft Heinz Earnings: Even Amid Strains, Sales and Profits Climb on Price Hikes; Shares Attractive
Erin Lash, CFA, Sector Director, 3 May 2023
Kraft Heinz adeptly withstood commodity, transportation, and logistics inflation as well as lingering
supply chain angst, as evidenced by solid first-quarter marks that sent shares up at a mid-single-digit
percentage clip. Organic sales popped 9.4%, while adjusted gross and operating margins expanded 130
and 90 basis points, respectively, to 32.8% and 19.5%. Higher prices at the shelf were once again a
major contributor, serving as a nearly 15% benefit to the top line, as volumes retreated 5.3% (still
modest relative to the level of price hikes passed through).
But we don’t surmise raising prices is its only path to dispel inflation’s rout (up 20% in fiscal 2022, with
a high-single-digit escalation pegged for fiscal 2023). Rather, we think Kraft Heinz’s regime is keenly
aware of the value in surgically extracting inefficiencies (now targeting $500 million in savings this year,
up from $400 million), which we perceive as judicious. While this pursuit could invoke concern given its
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past bent was anchored in blindly siphoning off costs, current management has been resolute that
investments in consumer-valued innovation and marketing support is a strategic priority, funded
through its cost-savings efforts. In this context, management is calling for a double-digit increase in
marketing spending this year; this aligns with our forecast for it to expend around 6% of sales, $1.7
billion, annually on research, development, and marketing.
When taken together, management boosted its fiscal 2023 adjusted EPS outlook to $2.83-$2.91 (from
$2.67-$2.75 prior), while holding the line on its call for 4%-6% organic sales growth. We’ll move our
preprint estimate ($2.74) to the revised range, but with no change to our long-term forecast (2% sales
growth and low-20s operating margin), our $52 is unlikely to shift. At a 20% discount to our intrinsic
valuation (and with a 4% dividend yield), though, we think investors would be wise to add this no-moat
name to their shopping cart.
Kraft Heinz’s Top Line Soars on the Heels of Renewed Commitment to Brand Spending; Shares a
Bargain Erin Lash, CFA, Sector Director, 15 Feb 2023
We don’t expect any material change to our $52 fair value estimate for no-moat Kraft Heinz after
digesting solid fourth-quarter marks of 10.4% organic sales growth, 60 basis points of degradation in the
adjusted gross margin to 32.2%, and a 20-basis-point shortfall in its adjusted operating margin to 20.3%.
While the market has taken a more somber view (with shares holding flat), we think Kraft Heinz should
be on investors’ shopping list, trading at a 25% discount to our intrinsic valuation while offering a 4%
dividend yield.
We think recent performance (which came in the face of pronounced inflationary pressure and supply
chain disruptions) is a byproduct of the firm’s astute focus since CEO Miguel Patricio took the helm in
mid-2019 to recenter the business on surgically extracting costs and prioritizing investment in its brands
(through consumer-valued innovation and marketing) and capabilities (through category management
and e-commerce). In our view, the prudence in this path is evident as sales sit 6% above fourth-quarter
2019’s level.
We recognize sales were jolted by a more than 15% contribution from higher prices (offset by a nearly
5% downdraft in volumes, modest relative to level of price hikes), but price hasn’t been the only lever
Kraft Heinz is flexing to offset input cost increases (up 20% in fiscal 2022, with a high-single-digit surge
slated for fiscal 2023). In this vein, the firm also unearthed $450 million in savings in fiscal 2022
(outpacing its $400 million annual target). And while this pursuit could be cause for concern given that
Kraft Heinz had been plagued by an outsize focus on siphoning off costs without a commensurate
increase in spending to support the long-term health of the business under its prior regime, current
management has been resolute that cost savings will fund reinvestment. This aligns with our forecast
calling for Kraft Heinz to direct 6% of sales ($1.7 billion) annually in research, development, and
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marketing.
Kraft Heinz Posts Sweet Q3 Sales Momentum Amid Supply Chain Bottlenecks and Rampant Inflation
Erin Lash, CFA, Sector Director, 26 Oct 2022
Although the market continues to snub Kraft Heinz (with the stock price about flat), we think this move
is unjustified given its stout 11.6% third-quarter organic sales growth, up 6.4% relative to the third
quarter of 2019. We acknowledge the level of pricing that Kraft Heinz has put through is massive (15.4%
on a consolidated basis, including 15.3% in North America), though the volume response is striking
(down just 3.8% and 4.4%, respectively). From our vantage point, these results evidence the prudence of
the strategic playbook CEO Miguel Patricio inked when he took the helm in 2019, prioritizing brand
(marketing and product innovation) and capability (category management and e-commerce)
investments, an approach that has merit even once current dynamics (the pandemic, macro challenges,
inflation, supply chain hurdles) are put to rest. And we posit spending to bolster the long-term health of
the business will continue to take top billing, with our forecast calling for Kraft Heinz to direct 6% of
sales ($1.7 billion) annually to such areas.
In contrast to sales, the profit picture soured—adjusted gross and operating margins dipped 250 and
170 basis points to 30% and 18%, respectively—and we see little to suggest commodity, packaging,
and transport costs will abate near term, with management expecting a 20% impact in fiscal 2022, up
from the mid- to high teens previously. Beyond raising prices to offset costs, Kraft Heinz has worked to
extract inefficiencies with aims to unearth $400 million in savings this year and alter price/packs strike,
which we view as prudent options to lessen the blow.
With just a few months left in the year, we aren’t altering our $51 fair value estimate (outside of a $1-$2
bump for time value) or long-term outlook for 2%-3% annual sales growth and low 20s operating
margins. However, with shares trading at a 30% discount to our intrinsic value and boasting a 4%
dividend yield, we think investors should this no-moat name to their carts.
Kraft Heinz Shares' Rout Unjustified Despite Inflation's Recent Toll Erin Lash, CFA, Sector Director, 27
Jul 2022
The market sent no-moat Kraft Heinz's shares down roughly 8% following second-quarter results,
reflecting the negative effects of inflation, but we believe this reaction is shortsighted, leaving investors
an opportunity to stock up at a 30% discount. Organic sales growth accelerated (to 10.1%, an
improvement from 6.8% in the first quarter), though the burden from commodity and supply chain costs
also swelled, driving a 270-basis-point erosion in adjusted operating margin to 19.7%. It’s unlikely these
cost headwinds will abate in the near term, with management now expecting a high-teens percentage
impact in fiscal 2022, up from the midteens three months ago. But in our view, Kraft Heinz is employing
multiple tactics—such as surgically raising prices, extracting inefficiencies with the aim to realize $400
ß
million in savings this year, and revenue growth management—that will blunt the hit to profits longer
term.
Despite the market's consternation, we think the 2.4% pullback in volume was modest, considering the
higher pricing (12.4%, which drove revenue growth in the quarter). We attribute this to the firm’s more
muted exposure to private label (just 11% now versus 17% in 2019 and lagging the high teens to low
20s in U.S. food and beverage) and enhanced agility in aligning its mix with evolving consumer trends.
We expect that under CEO Miguel Patricio, Kraft Heinz will continue prioritizing investments in research,
development, and marketing (amounting to 6% of sales annually in our forecast, up from less than 5%
during 2016-19) to ensure it continues to win with consumers.
Management edged up its organic sales growth target to high single digits from midsingle digits, but it
held the line on its profit aim for adjusted EBITDA of $5.8 billion-$6 billion. We’ll fine-tune our near-term
forecast but see little to warrant amending our $51 fair value estimate or long-term outlook for 2%-3%
annual sales growth and low 20s operating margins. K
ß
Competitors Price vs. Fair Value
Campbell Soup Co CPB
Fair Value: 61.00

26 Jul 2023 20:39, UTC
200
Last Close: 43.04
150 Over Valued
Under Valued
100
50
0
2018 2019 2020 2021 2022 YTD
0.73 1.09 1.00 0.90 1.03 0.71 Price/Fair Value
-28.52 54.05 0.67 -7.05 33.99 -22.20 Total Return %
Morningstar Rating
Total Return % as of 15 Sep 2023. Last Close as of 15 Sep 2023. Fair Value as of 26 Jul 2023 20:39, UTC.
General Mills Inc GIS
Fair Value: 78.00

6 Apr 2023 18:08, UTC
200
Last Close: 65.85
150 Over Valued
Under Valued
100
50
0
2018 2019 2020 2021 2022 YTD
0.68 0.99 1.11 1.01 1.15 0.84 Price/Fair Value
-31.02 42.58 13.48 18.06 27.56 -19.48 Total Return %
Morningstar Rating
Total Return % as of 15 Sep 2023. Last Close as of 15 Sep 2023. Fair Value as of 6 Apr 2023 18:08, UTC.
ß
Kellogg Co K
Fair Value: 84.00

29 Mar 2023 16:11, UTC
200
Last Close: 59.96
150 Over Valued
Under Valued
100
50
0
2018 2019 2020 2021 2022 YTD
0.70 0.89 0.76 0.76 0.87 0.71 Price/Fair Value
-12.90 25.28 -6.72 7.23 14.22 -13.34 Total Return %
Morningstar Rating
Total Return % as of 15 Sep 2023. Last Close as of 15 Sep 2023. Fair Value as of 29 Mar 2023 16:11, UTC.
ß
Morningstar Historical Summary

Financials as of 30 Jun 2023
Fiscal Year, ends 31 Dec 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 YTD TTM
Revenue (USD Bil) 18 18 18 26 26 26 25 26 26 26 13 27
Revenue Growth % -0.3 -0.1 0.7 43.4 -0.9 0.7 -4.9 4.8 -0.5 1.7 4.9 5.7
EBITDA (USD Mil) 4,984 2,275 3,074 7,410 7,715 -9,054 5,016 3,393 4,665 4,820 3,114 5,632
EBITDA Margin % 27.4 12.5 16.8 28.2 29.6 -34.5 20.1 13.0 17.9 18.2 23.6 20.8
Operating Income (USD Mil) 4,699 1,889 2,639 5,619 6,106 5,771 5,141 5,728 5,308 4,682 2,665 4,979
Operating Margin % 25.8 10.4 14.4 21.4 23.4 22.0 20.6 21.9 20.4 17.7 20.2 18.4
Net Income (USD Bil) 2.72 1.04 0.63 3.60 10.94 -10.19 1.94 0.36 1.01 2.36 1.84 3.16
Net Margin % 14.8 5.7 -1.5 13.0 42.0 -38.8 7.8 1.4 3.9 8.9 13.9 11.7
Diluted Shares Outstanding (Mil) 599 598 786 1,226 1,228 1,219 1,224 1,228 1,224 1,226 1,235 1,227
Diluted Earnings Per Share (USD) 4.51 1.74 -0.34 2.78 8.91 -8.36 1.58 0.29 0.82 1.91 1.49 2.56
Dividends Per Share (USD) — — 1.70 2.35 2.45 2.50 1.60 1.60 1.60 1.60 0.80 1.60
Valuation as of 31 Aug 2023

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Recent Qtr TTM
Price/Sales — — 2.8 4.0 3.6 2.0 1.5 1.6 1.7 1.9 1.6 1.5
Price/Earnings — — -47.6 33.9 24.3 5.1 -3.6 -87.0 19.2 41.5 18.1 12.9
Price/Cash Flow — — 24.0 23.4 22.5 37.5 10.6 8.7 11.0 11.4 17.6 12.4
Dividend Yield % — — 2.34 2.69 3.15 5.81 4.98 4.62 4.46 3.93 4.51 4.84
Price/Book — — 1.5 1.8 1.6 0.8 0.8 0.9 0.9 1.0 0.9 0.8
EV/EBITDA 0.0 0.0 38.2 18.2 16.2 -9.2 13.5 20.1 14.1 14.3 0.0 0.0
Operating Performance / Profitability as of 30 Jun 2023
Fiscal Year, ends 31 Dec 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 YTD TTM
ROA % 11.7 4.5 -0.4 2.8 9.1 -9.1 1.9 0.4 1.1 2.6 2.0 3.5
ROE % 61.7 21.7 -0.9 5.9 17.8 -17.3 3.8 0.7 2.0 4.8 3.7 6.4
ROIC % 21.2 9.5 1.2 4.9 12.5 -10.1 3.5 1.7 3.0 4.4 3.2 5.6
Asset Turnover 0.8 0.8 0.3 0.2 0.2 0.2 0.2 0.3 0.3 0.3 0.1 0.3
Financial Leverage
Fiscal Year, ends 31 Dec 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Recent Qtr TTM
Debt/Capital % 65.8 66.4 27.6 34.1 30.1 37.3 35.3 35.9 29.9 28.3 28.0 —
Equity/Assets % 22.4 19.0 46.9 47.6 54.8 49.9 50.9 50.2 52.8 53.8 54.8 —
Total Debt/EBITDA 2.0 4.4 9.4 4.4 4.1 -3.4 5.8 8.3 4.7 4.2 6.4 —
EBITDA/Interest Expense 9.9 4.7 2.3 6.5 6.3 -7.1 3.7 2.4 2.3 5.2 6.8 6.3
Morningstar Analyst Historical/Forecast Summary as of 24 Aug 2023

Financials Estimates Forward Valuation Estimates
2021 2022 2023 2024 2025
Fiscal Year, ends 12-31-2022 2021 2022 2023 2024 2025
Price/Sales 1.7 1.9 1.5 1.5 1.4
Revenue (USD Mil) 26,042 26,485 27,095 27,668 28,385 Price/Earnings 12.3 14.6 11.5 11.1 9.9
Revenue Growth % -0.5 1.7 2.3 2.1 2.6 Price/Cash Flow — — — — —
EBITDA (USD Mil) 6,371 6,014 6,095 6,243 6,637 Dividend Yield % 4.5 3.9 5.0 5.3 5.5
EBITDA Margin % 24.5 22.7 22.5 22.6 23.4 Price/Book 0.9 1.0 0.8 0.8 0.8
EV/EBITDA 10.3 11.5 9.9 9.6 9.1
Operating Income (USD Mil) 5,461 5,081 5,076 5,218 5,593
Operating Margin % 21.0 19.2 18.7 18.9 19.7
Net Income (USD Mil) 3,625 3,439 3,583 3,683 4,034
Net Margin % 13.9 13.0 13.2 13.3 14.2
Diluted Shares Outstanding (Mil) 1,236 1,235 1,235 1,223 1,194
Diluted Earnings Per Share(USD) 2.93 2.78 2.90 3.01 3.38
Dividends Per Share(USD) 1.60 1.60 1.68 1.76 1.85
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ESG Risk Rating Breakdown
Exposure Subject Subindustry (55.0) u Exposure represents a company’s vulnerability to ESG

Company Exposure1 57.5 risks driven by their business model
57.5
u Exposure is assessed at the Subindustry level and then
– Manageable Risk 53.4 High
2 0 55+ specified at the company level
Unmanageable Risk 4.1
Low Medium High u Scoring ranges from 0-55+ with categories of low, me-
dium, and high-risk exposure
Management
u Management measures a company’s ability to manage
Manageable Risk 53.4 ESG risks through its commitments and actions
44.6%
– Managed Risk3 23.8 Average
u Management assesses a company's efficiency on ESG
Management Gap4 29.6 100 0 programs, practices, and policies

Strong Average Weak u Management score ranges from 0-100% showing how
Overall Unmanaged Risk 33.7 much manageable risk a company is managing
ESG Risk Rating ESG Risk Rating Assessment5

33.70
High
Negligible Low Medium High Severe ESG Risk Rating is of Sep 06, 2023. Highest Controversy Level is as of Sep 08,
2023. Sustainalytics Subindustry: Packaged Foods. Sustainalytics provides
ESG Risk Ratings measure the degree to which a company’s value is impacted by environmental, social, and governance Morningstar with company ESG ratings and metrics on a monthly basis and
risks, by evaluating the company’s ability to manage the ESG risks it faces. as such, the ratings in Morningstar may not necessarily reflect current
Sustainalytics’ scores for the company. For the most up to date rating and
1. A company's Exposure to material ESG issues 2. Unmanageable Risk refers to risks that are inherent to a particular business model that cannot be managed by more information, please visit: sustainalytics.com/esg-ratings/.
programs or initiatives 3. Managed Risk = Manageable Risk multiplied by a Management score of 44.6% 4. Management Gap assesses risks that are not
managed, but are considered manageable 5. ESG Risk Rating Assessment = Overall Unmanaged Risk = Management Gap plus Unmanageable Risk
Peer Analysis 06 Sep 2023 Peers are selected from the company's Sustainalytics-defined Subindustry and are displayed based on the closest market cap values
Company Name Exposure Management ESG Risk Rating
The Kraft Heinz Co 57.5 | High 0 55+ 44.6 | Average 100 0 33.7 | High 0 40+
Campbell Soup Co 55.1 | High 0 55+ 61.7 | Strong 100 0 23.5 | Medium 0 40+
General Mills Inc 53.0 | Medium 0 55+ 64.7 | Strong 100 0 21.1 | Medium 0 40+
Kellogg Co 54.5 | Medium 0 55+ 51.5 | Strong 100 0 28.4 | Medium 0 40+
Nestle SA 54.9 | Medium 0 55+ 54.2 | Strong 100 0 27.3 | Medium 0 40+
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Appendix
Historical Morningstar Rating
The Kraft Heinz Co KHC 15 Sep 2023 21:18, UTC
Dec 2023 Nov 2023 Oct 2023 Sep 2023 Aug 2023 Jul 2023 Jun 2023 May 2023 Apr 2023 Mar 2023 Feb 2023 Jan 2023
- - - QQQQQ QQQQQ QQQQQ QQQQQ QQQQ QQQQ QQQQ QQQQ QQQQ
QQQQ QQQQ QQQQ QQQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ
QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQ QQQQ QQQQ QQQQ QQQQ
QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQQ QQQQQ QQQQ
QQQQ QQQQ QQQQ QQQQQ QQQQQ QQQQQ QQQQQ QQQQQ QQQQQ QQQQQ QQQQQ QQQQ
QQQQ QQQQ QQQQ QQQ QQQ QQQ QQQ QQQQ QQQQ QQQQ QQQ QQ
Campbell Soup Co CPB 15 Sep 2023 21:18, UTC
- - - QQQQ QQQQ QQQQ QQQQ QQQQ QQQ QQQ QQQ QQQ
QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQQ QQQ QQQ
QQQQ QQQQ QQQQ QQQQ QQQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ
QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ
QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQQ QQQQ QQQQ QQQQ QQQQ
QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQQ QQQQ QQQQ QQQQ QQQ
General Mills Inc GIS 15 Sep 2023 21:18, UTC
- - - QQQQ QQQQ QQQ QQQ QQ QQ QQ QQQ QQ
QQ QQ QQ QQ QQQ QQQ QQQ QQQ QQ QQQ QQQ QQQ
QQQ QQQ QQQQ QQQQ QQQ QQQ QQQ QQ QQQ QQ QQQ QQQ
QQ QQ QQ QQ QQ QQ QQ QQ QQ QQQ QQQQ QQQ
QQQ QQQ QQQ QQQ QQQ QQQ QQQQ QQQQ QQQQ QQQQ QQQQQ QQQQQ
QQQQQ QQQQQ QQQQQ QQQQQ QQQQQ QQQQQ QQQQQ QQQQQ QQQQQ QQQQQ QQQQ QQQ
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Kellogg Co K 15 Sep 2023 21:18, UTC
- - - QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ
QQQQ QQQQ QQQ QQQQ QQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ
QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ
QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ
QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQQ QQQQQ QQQQ QQQQ QQQQ QQQQ
QQQQ QQQQ QQQQ QQQQ QQQ QQQ QQQ QQQQ QQQQ QQQQ QQQ QQQ
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Overview turns on invested capital (or ROIC) over and above our es- rive our annual free cash flow forecast.
At the heart of our valuation system is a detailed projec- timate of a firm’s cost of capital, or weighted average
Stage II: Fade
tion of a company’s future cash flows, resulting from our cost of capital (or WACC). Without a moat, profits are
The second stage of our model is the period it will take
analysts’ research. Analysts create custom industry and more susceptible to competition. We have identified five
the company’s return on new invested capital—the re-
company assumptions to feed income statement, balance sources of economic moats: intangible assets, switching
turn on capital of the next dollar invested (“RONIC”)—to
sheet, and capital investment assumptions into our glob- costs, network effect, cost advantage, and efficient scale.
decline (or rise) to its cost of capital. During the Stage II
ally standardized, proprietary discounted cash flow, or
Companies with a narrow moat are those we believe are period, we use a formula to approximate cash flows in
DCF, modeling templates. We use scenario analysis, inde-
more likely than not to achieve normalized excess returns lieu of explicitly modeling the income statement, balance
pth competitive advantage analysis, and a variety of other
for at least the next 10 years. Wide-moat companies are sheet, and cash flow statement as we do in Stage I. The
analytical tools to augment this process. Moreover, we
those in which we have very high confidence that excess length of the second stage depends on the strength of
think analyzing valuation through discounted cash flows
returns will remain for 10 years, with excess returns more the company’s economic moat. We forecast this period to
presents a better lens for viewing cyclical companies,
likely than not to remain for at least 20 years. The longer last anywhere from one year (for companies with no eco-
high-growth firms, businesses with finite lives (e.g.,
a firm generates economic profits, the higher its intrinsic nomic moat) to 10–15 years or more (for wide-moat com-
mines), or companies expected to generate negative
value. We believe low-quality, no-moat companies will panies). During this period, cash flows are forecast using
earnings over the next few years. That said, we don’t dis-
see their normalized returns gravitate toward the firm’s four assumptions: an average growth rate for EBI over the
miss multiples altogether but rather use them as support-
cost of capital more quickly than companies with moats. period, a normalized investment rate, average return on
ing cross-checks for our DCF-based fair value estimates.
new invested capital (RONIC), and the number of years
We also acknowledge that DCF models offer their own
When considering a company's moat, we also assess until perpetuity, when excess returns cease. The invest-
challenges (including a potential proliferation of estim-
whether there is a substantial threat of value destruction, ment rate and return on new invested capital decline un-
ated inputs and the possibility that the method may miss
stemming from risks related to ESG, industry disruption, til a perpetuity value is calculated. In the case of firms
shortterm market-price movements), but we believe these
financial health, or other idiosyncratic issues. In this con- that do not earn their cost of capital, we assume marginal
negatives are mitigated by deep analysis and our
text, a risk is considered potentially value destructive if its ROICs rise to the firm’s cost of capital (usually attribut-
longterm approach.
occurrence would eliminate a firm’s economic profit on a able to less reinvestment), and we may truncate the
cumulative or midcycle basis. If we deem the probability second stage.
Morningstar’s equity research group (”we,” “our”) be-
lieves that a company’s intrinsic worth results from the of occurrence sufficiently high, we would not characterize
the company as possessing an economic moat. Stage III: Perpetuity
future cash flows it can generate. The Morningstar Rating
Once a company’s marginal ROIC hits its cost of capital,
for stocks identifies stocks trading at a discount or premi-
2. Estimated Fair Value we calculate a continuing value, using a standard per-
um to their intrinsic worth—or fair value estimate, in
Combining our analysts’ financial forecasts with the petuity formula. At perpetuity, we assume that any
Morningstar terminology. Five-star stocks sell for the
firm’s economic moat helps us assess how long returns growth or decline or investment in the business neither
biggest risk adjusted discount to their fair values, where-
on invested capital are likely to exceed the firm’s cost of creates nor destroys value and that any new investment
as 1-star stocks trade at premiums to their intrinsic worth.
capital. Returns of firms with a wide economic moat rat- provides a return in line with estimated WACC.
Four key components drive the Morningstar rating: (1) our ing are assumed to fade to the perpetuity period over a
longer period of time than the returns of narrow-moat Because a dollar earned today is worth more than a dollar
assessment of the firm’s economic moat, (2) our estimate
firms, and both will fade slower than no-moat firms, in- earned tomorrow, we discount our projections of cash
of the stock’s fair value, (3) our uncertainty around that
creasing our estimate of their intrinsic value. flows in stages I, II, and III to arrive at a total present
fair value estimate and (4) the current market price. This
value of expected future cash flows. Because we are
process ultimately culminates in our singlepoint star rat-
Our model is divided into three distinct stages: modeling free cash flow to the firm—representing cash
ing.
available to provide a return to all capital providers—we
discount future cash flows using the WACC, which is a
1. Economic Moat Stage I: Explicit Forecast
weighted average of the costs of equity, debt, and pre-
The concept of an economic moat plays a vital role not In this stage, which can last five to 10 years, analysts
ferred stock (and any other funding sources), using ex-
only in our qualitative assessment of a firm’s long-term make full financial statement forecasts, including items
pected future proportionate long-term, market-value
investment potential, but also in the actual calculation of such as revenue, profit margins, tax rates, changes in
weights.
our fair value estimates. An economic moat is a structural workingcapital accounts, and capital spending. Based on
feature that allows a firm to sustain excess profits over a these projections, we calculate earnings before interest,
3. Uncertainty Around That Fair Value Estimate
long period of time. We define economic profits as re- after taxes (EBI) and the net new investment (NNI) to de-
Morningstar’s Uncertainty Rating is designed to capture
the range of potential outcomes for a company’s intrinsic
Morningstar Equity Research Star Rating Methodology
value. This rating is used to assign the margin of safety
required before investing, which in turn explicitly drives
our stock star rating system. The Uncertainty Rating is
aimed at identifying the confidence we should have in as-
signing a fair value estimate for a given stock.
Our Uncertainty Rating is meant to take into account any-

thing that can increase the potential dispersion of future
outcomes for the intrinsic value of a company, and any-
ß
thing that can affect our ability to accurately predict Morningstar Equity Research Star Rating Methodology
these outcomes. The rating begins with a suggested rat-
ing produced by a quantitative process based on the trail-
ing 12-month standard deviation of daily stock returns.
An analyst overlay is then applied, with analysts using
the suggested rating, historical rating data, and their own
knowledge of the company to inform them as they make
the final Uncertainty Rating decision. Ultimately, the rat-
ing decision rests with the analyst. Analysts take into ac-
count many characteristics when making their final de-
cision, including cyclical factors, operational and financial
factors such as leverage, company-specific events, ESG
risks, and anything else that might increase the potential
dispersion of future outcomes and our ability to estimate
those outcomes.
Our recommended margin of safety—the discount to fair

value demanded before we’d recommend buying or
selling the stock—widens as our uncertainty of the es-
timated value of the equity increases. The more uncertain
we are about the potential dispersion of outcomes, the
greater the discount we require relative to our estimate of
the value of the firm before we would recommend the
purchase of the shares. In addition, the Uncertainty Rat-
ing provides guidance in portfolio construction based on
risk tolerance. Once we determine the fair value estimate of a stock, we justed return is highly likely over a multiyear time frame.
compare it with the stock’s current market price on a Scenario analysis developed by our analysts indicates
Our Uncertainty Ratings are: Low, Medium, High, Very daily basis, and the star rating is automatically re-calcu- that the current market price represents an excessively
High, and Extreme. lated at the market close on every day the market on pessimistic outlook, limiting downside risk and maximiz-
which the stock is listed is open. Our analysts keep close ing upside potential.
Margin of Safety
tabs on the companies they follow, and, based on thor-
Qualitative Analysis
QRating ough and ongoing analysis, raise or lower their fair value QQQQ We believe appreciation beyond a fair risk-ad-
Uncertainty Ratings QQQQQRating
estimates as warranted. justed return is likely.
Low 20% Discount 25% Premium
Medium 30% Discount 35% Premium QQQ Indicates our belief that investors are likely to re-
Please note, there is no predefined distribution of stars.
High 40% Discount 55% Premium ceive a fair risk-adjusted return (approximately cost of
That is, the percentage of stocks that earn 5 stars can
Very High 50% Discount 75% Premium equity).
fluctuate daily, so the star ratings, in the aggregate, can
Extreme 75% Discount 300% Premium
serve as a gauge of the broader market’s valuation. When
there are many 5-star stocks, the stock market as a whole QQ We believe investors are likely to receive a less than
Our uncertainty rating is based on the interquartile range, fair risk-adjusted return.
is more undervalued, in our opinion, than when very few
or the middle 50% of potential outcomes, covering the
companies garner our highest rating.
25th percentile–75th percentile. This means that when a Q Indicates a high probability of undesirable risk-adjus-
stock hits 5 stars, we expect there is a 75% chance that ted returns from the current market price over a multiyear
We expect that if our base-case assumptions are true the
the intrinsic value of that stock lies above the current time frame, based on our analysis. Scenario analysis by
market price will converge on our fair value estimate over
market price. Similarly, when a stock hits 1 star, we ex- our analysts indicates that the market is pricing in an ex-
time generally within three years (although it is im-
pect there is a 75% chance that the intrinsic value of that cessively optimistic outlook, limiting upside potential and
possible to predict the exact time frame in which market
stock lies below the current market price. leaving the investor exposed to Capital loss.
prices may adjust).
4. Market Price Our star ratings are guideposts to a broad audience and Other Definitions
The market prices used in this analysis and noted in the individuals must consider their own specific investment Last Price: Price of the stock as of the close of the mar-
report come from exchange on which the stock is listed goals, risk tolerance, tax situation, time horizon, income ket of the last trading day before date of the report.
which we believe is a reliable source. needs, and complete investment portfolio, among other
factors. Capital Allocation Rating: Our Capital Allocation (or
For more details about our methodology, please go to Stewardship) Rating represents our assessment of the
https://shareholders.morningstar.com The Morningstar Star Ratings for stocks are defined be- quality of management’s capital allocation, with particu-
low: lar emphasis on the firm’s balance sheet, investments,
Morningstar Star Rating for Stocks QQQQQ We believe appreciation beyond a fair risk ad- and shareholder distributions. Analysts consider compan-
ß
ies’ investment strategy and valuation, balance sheet starting at zero (no risk) with lower scores representing mendations made herein may not be suitable for all in-
management, and dividend and share buyback policies. less unmanaged risk and, for 95% of cases, the unman- vestors: recipients must exercise their own independent
Corporate governance factors are only considered if they aged ESG Risk score is below 50. judgment as to the suitability of such investments and re-
are likely to materially impact shareholder value, though commendations in the light of their own investment ob-
either the balance sheet, investment, or shareholder dis- Based on their quantitative scores, companies are jectives, experience, taxation status and financial posi-
tributions. Analysts assign one of three ratings: "Exem- grouped into one of five Risk Categories (negligible, low, tion.
plary", "Standard", or "Poor". Analysts judge Capital Alloc- medium, high, severe). These risk categories are absolute,
ation from an equity holder’s perspective. Ratings are de- meaning that a ‘high risk’ assessment reflects a compar- The information, data, analyses and opinions presented
termined on a forward looking and absolute basis. The able degree of unmanaged ESG risk across all subindus- herein are not warranted to be accurate, correct, com-
Standard rating is most common as most managers will tries covered. plete or timely. Unless otherwise provided in a separate
exhibit neither exceptionally strong nor poor capital alloc- agreement, neither Morningstar, Inc. or the Equity Re-
ation. The ESG Risk Rating Assessment is a visual representa- search Group represents that the report contents meet all
tion of Sustainalytics ESG Risk Categories on a 1 to 5 of the presentation and/or disclosure standards applic-
Capital Allocation (or Stewardship) analysis published pri- scale. Companies with Negligible Risk = 5 Globes, Low able in the jurisdiction the recipient is located.
or to Dec. 9, 2020, was determined using a different pro- Risk = 4, Medium Risk = 3 Globes, High Risk = 2 Globes,
cess. Beyond investment strategy, financial leverage, and Severe Risk = 1 Globe. For more information, please visit Except as otherwise required by law or provided for in a
dividend and share buyback policies, analysts also con- sustainalytics.com/esg-ratings/ separate agreement, the analyst, Morningstar, Inc. and
sidered execution, compensation, related party transac- the Equity Research Group and their officers, directors
tions, and accounting practices in the rating. Ratings should not be used as the sole basis in evaluating and employees shall not be responsible or liable for any
a company or security. Ratings involve unknown risks and trading decisions, damages or other losses resulting from,
Capital Allocation Rating: Our Capital Allocation (or uncertainties which may cause our expectations not to or related to, the information, data, analyses or opinions
Stewardship) Rating represents our assessment of the occur or to differ significantly from what was expected within the report. The Equity Research Group encourages
quality of management’s capital allocation, with particu- and should not be considered an offer or solicitation to recipients recipients of this report to read all relevant is-
lar emphasis on the firm’s balance sheet, investments, buy or sell a security. sue documents (e.g., prospectus) pertaining to the secur-
and shareholder distributions. Analysts consider compan- ity concerned, including without limitation, information
ies’ investment strategy and valuation, balance sheet Risk Warning relevant to its investment objectives, risks, and costs be-
management, and dividend and share buyback policies. Please note that investments in securities are subject to fore making an in vestment decision and when deemed
Corporate governance factors are only considered if they market and other risks and there is no assurance or guar- necessary, to seek the advice of a legal, tax, and/or ac-
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Morningstar Equity Analyst Report | Report as of 16 Sep 2023 04:27, UTC | Reporting Currency: USD | Trading Currency: USD

| Exchange: NASDAQ - ALL MARKETS Page 1 of 21

The Kraft Heinz Co KHC QQQQQ 15 Sep 2023 21:18, UTC

Price vs. Fair Value

Fair Value: 53.00

The Kraft Heinz Co KHC QQQQQ 15 Sep 2023 21:18, UTC

Bears Say Erin Lash, CFA, Sector Director, 24 Aug 2023

pocketbooks become more acute, we think competitive intensity could resurface.

Economic Moat Erin Lash, CFA, Sector Director, 24 Aug 2023

The Kraft Heinz Co KHC QQQQQ 15 Sep 2023 21:18, UTC

Fair Value Fair Value Fair Value Fair Value

Economic Moat None Wide Narrow Wide

The Kraft Heinz Co KHC QQQQQ 15 Sep 2023 21:18, UTC

The Kraft Heinz Co KHC QQQQQ 15 Sep 2023 21:18, UTC

Capital Allocation Erin Lash, CFA, Sector Director, 24 Aug 2023

The Kraft Heinz Co KHC QQQQQ 15 Sep 2023 21:18, UTC

The Kraft Heinz Co KHC QQQQQ 15 Sep 2023 21:18, UTC

Analyst Notes Archive

The Kraft Heinz Co KHC QQQQQ 15 Sep 2023 21:18, UTC

Lash, CFA, Sector Director, 2 Aug 2023

The Kraft Heinz Co KHC QQQQQ 15 Sep 2023 21:18, UTC

The Kraft Heinz Co KHC QQQQQ 15 Sep 2023 21:18, UTC

The Kraft Heinz Co KHC QQQQQ 15 Sep 2023 21:18, UTC

The Kraft Heinz Co KHC QQQQQ 15 Sep 2023 21:18, UTC

Competitors Price vs. Fair Value

Campbell Soup Co CPB

Fair Value: 61.00

General Mills Inc GIS

Fair Value: 78.00

The Kraft Heinz Co KHC QQQQQ 15 Sep 2023 21:18, UTC

Fair Value: 84.00

The Kraft Heinz Co KHC QQQQQ 15 Sep 2023 21:18, UTC

Morningstar Historical Summary

Valuation as of 31 Aug 2023

Morningstar Analyst Historical/Forecast Summary as of 24 Aug 2023

The Kraft Heinz Co KHC QQQQQ 15 Sep 2023 21:18, UTC

ESG Risk Rating Breakdown

Exposure Subject Subindustry (55.0) u Exposure represents a company’s vulnerability to ESG

dium, and high-risk exposure

Management Gap4 29.6 100 0 programs, practices, and policies

Overall Unmanaged Risk 33.7 much manageable risk a company is managing

ESG Risk Rating ESG Risk Rating Assessment5

Campbell Soup Co CPB 15 Sep 2023 21:18, UTC

General Mills Inc GIS 15 Sep 2023 21:18, UTC

Kellogg Co K 15 Sep 2023 21:18, UTC

Research Methodology for Valuing Companies

Our Uncertainty Rating is meant to take into account any-

Research Methodology for Valuing Companies

Our recommended margin of safety—the discount to fair

Research Methodology for Valuing Companies

Research Methodology for Valuing Companies

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