Ketchup Crushed by Disastrous Earnings

Kraft Heinz Co (NASDAQ: KHC) share prices imploded early this morning during premarket trading, dropping a staggering 25% after reporting earnings. The company endured an earnings per share (EPS) miss of almost 10%, wrote down (recognized a value reduction of) two of its most iconic brands, and slashed its dividend. Pretty rough, right?

As bad as all of that sounds, the real showstopper was the surprise reveal of an SEC subpoena, which Kraft Heinz Co received in October of last year after accounting discrepancies were discovered.

It’s a potentially fatal blow for KHC bulls in 2019, who saw promise in the stock after it dropped nearly 29% over the course of last year. Since January 1st, share prices have been slowly climbing along with the rest of the market, rising almost 12%. For opportunistic traders, it seemed like the ketchup company’s problems were in the rear view mirror…

…Until today.

Even though Kraft Heinz Co’s iconic ketchup brand escaped somewhat unscathed, Kraft and Oscar Meyer – both famous American grocery store staples – saw crippling losses for the fourth quarter. Kraft posted a net loss of $12.61 billion all on its own during a quarter that saw an $8 billion gain for the brand in 2017.

Displeasing investors even further was a dividend reduction of 36%, cutting down the KHC dividend to a measly 40 cents per share (compared to the 62.5 cents per share from a quarter earlier). Kraft Heinz Co maintains that the decision to do so was a purely tactical one, in order to “provide greater balance sheet flexibility.”

Frame it however you’d like, but slashing dividends won’t make anyone happy (except for bears, maybe).

And because misery loves company, ever since KHC reported earnings, the ratings agencies of the world have piled on, downgrading the company across the board. Deutsche Bank shifted their recommendation from “buy” to “hold”, and PiperJaffray now considers Kraft Heinz Co “overweight”.

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How rude! At the most, I’d call the company “big boned”.

Consumer Staples Equity Research analyst Rob Dickerson remarked that “our visibility with respect to the depth, duration, and general profitability effects of such customer- and consumer-building into 2019 is less clear and lowers our conviction on the name.”

Other analysts, like PiperJaffray’s Michael Lavery, are confident that KHC management is doing the right things, but still remain worried that the company’s key brands have lost their luster with consumers:

“We believe these impairments validate fears that KHC may have been more focused on costs than building brand equity, and even if management now has ‘seen the light’, we are now concerned that its brands lack the equity to drive pricing power needed to compete and drive growth in a sustainable way.”

Company executives, long-time investors, and key employees are all feeling some post-earnings pain today, but one group is arguably suffering even more:

Bulls who bought call options (not as part of a spread, straddle, or strangle) ahead of earnings, expecting share prices to rise.

It’s one of those things that drives me absolutely crazy, and is nothing more than gambling when it comes down to it. Several users on Reddit’s eccentric investing community, r/WallStreetBets, were burned by their risky earnings play.

“KHC’s 2017 Q4 results were impeccable and everything was pointing in the right direction by the end of the year. There goes my spring break to Cabo,” remarked one subreddit member, who lost 98% of their position overnight.

It’s a cautionary tale that all investors could learn from, because the most dangerous thing any trader can do is assume that they know something the rest of the market doesn’t. Trying to play earnings this way is downright dangerous (and illegal if you actually have insider information), and today’s KHC fiasco is yet another prime example of what can happen when you try to predict company revenue reports.

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