The Kraft Heinz Co KHC

Rampant cost pressures, supply chain disruptions, and stepped-up competition did not derail no-moat Kraft Heinz’s performance in the third quarter; we attribute its results to the foresight to set out on a revised strategic course even before COVID-19 took hold. Organic sales edged up 1.3% versus a year ago and impressively jumped 7.6% relative to the prepandemic period in 2019. Further, while adjusted operating margins contracted 250 basis points over last year to 19.8%, we’re encouraged that management has opted to continue funneling resources to support its brands and capabilities despite facing unrelenting inflationary headwinds. In this context, advertising was up 9% through the first nine months of the year, and research and development spend has increased to the tune of 17%. In addition, Kraft Heinz has directed 3.4% of sales toward capital expenditures year to date, versus just 2.1% over the same horizon in 2020. Although the market doesn’t seem enamored (with shares down a touch), we think results showcase the extent to which the company has prudently prioritized investments for the long-term health of the business (as opposed to its previous mandate to boost margins at all costs) since CEO Miguel Patricio took the helm in mid-2019.