Kraft Heinz (KHC 0.95%) is a top consumer company with many popular brands in its portfolio. In addition to Kraft and Heinz, it also has Oscar Mayer, Jell-O, Lunchables, and many other staples that people buy every month.
But having a strong mix of brands hasn't been enough to make the stock a good buy in recent years. Last year, the stock declined by 17%. The last time Kraft Heinz was trading at lower levels than where it is today was during the crash of 2020.
Has the stock become a steal of a deal, or are there simply too many problems plaguing Kraft Heinz for it to be a good buy today?
Lack of growth is a big problem for Kraft Heinz
The glaring issue with Kraft Heinz these days is that the business simply isn't growing. The company's products aren't known for being healthy options, and as younger demographics become more concerned with healthy eating, Kraft Heinz's top line may come under more pressure in the future. The company recently pulled Lunchables from U.S. schools due to a lack of demand.
KHC Operating Revenue (Quarterly YoY Growth) data by YCharts.
Averaging low single-digit growth over the past five years isn't going to inspire many investors to buy the food stock. This is even as rising prices have helped many food companies benefit from higher sales numbers. While Kraft Heinz's top line did see periods of faster growth in recent years, for the most part it has been struggling to grow its business in a meaningful way.
The good news, however, is that the business is still profitable. Kraft Heinz has achieved a 20% operating margin on its sales over the past 12 months.
Has Kraft Heinz become a value trap?
Kraft Heinz may appear to be a good value stock to own. It has hit a new 52-week low, and its forward price-to-earnings multiple looks dirt cheap at just 9. But that's based on analyst estimates. If analysts adjust their estimates lower for the business and expect to see worse numbers from Kraft Heinz, that multiple could quickly climb higher.
If investors focus too much on the company's low forward earnings multiple, that could potentially lure them into buying shares despite its underwhelming financial numbers and poor growth prospects. Today, the stock resembles a value trap more than it does a bargain buy, and that can make it a risky investment to add to your portfolio.
Is Kraft Heinz's stock worth the risk?
Valuation alone shouldn't be the driving force in buying a stock. Sure, Kraft looks cheap on paper, but that's based on earnings numbers and estimates that can change in the future. If the company doesn't turn things around and improve on its growth rate, analysts could have no choice but to adjust their earnings projections for the business. As that happens, this seemingly cheap stock could suddenly look a lot more expensive.
Another reason to buy the stock may be for its dividend. Kraft Heinz's stock yields 5.6%, and that may incentivize investors to be patient with the company. While that payout is sustainable given the company's strong free cash flow, that could also be a risky reason to hold the stock in your portfolio. That dividend income may only end up helping investors offset the declines in the share price if the business continues to underperform. Plus, if the company's financials deteriorate in the future, the payout may not prove to be all that safe.
Without a growth catalyst to suggest that the business may be on a more positive trajectory in the future, investors may be better off taking a wait-and-see approach with Kraft Heinz. While it may be tempting to think the stock has bottomed out, that's a risky position to take, as things can always get worse for investors.
