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Kraft Heinz is running out of cash: top analyst

Brian Sozzi
Editor-at-Large

Saving macaroni and cheese maker Kraft Heinz (KHC) may be one of the toughest gigs in Corporate America today (well that and trying to run what’s left of Sears).

But come July 1, veteran marketer Miguel Patricio will officially take his crack as CEO of Kraft Heinz. He assumes the mantle of a company left mostly in tatters by outgoing CEO Bernardo Hees, a long-time 3G cost-cutting focused executive who has led the company since its merger in 2015. The iconic company has been embarrassed by two years of terrible sales growth, a $15 billion write-down to the Kraft and Oscar Meyer trademarks, a depleted corporate culture, an awful stock price and a subpoena from the U.S. Securities and Exchange Commission related to an investigation of its accounting practices.

As we said, this won’t be an easy C-suite gig.

“In our view, Patricio faces a monumental challenge to put Kraft Heinz on a path to success as a standalone company,” contends Guggenheim Securities analyst Laurent Grandet.

Kraft Heinz’s stock has crashed 50% over the past year as its struggles have sent investors packing. The performance — fueled by years of under-investment in its plethora of brands in a bid to boost profits and an industry shift to fresher food — is more disappointing given the rally in comparable staples such as PepsiCo, Coca-Cola and General Mills.

But digging through Grandet’s latest note, one can’t help but to wonder if there is another shoe (or shoes) to drop at Kraft Heinz. A shoe that could completely obliterate the stock price.

“The company finds itself in a precarious situation where (1) the balance sheet is constrained by a high debt burden, (2) the brands are in dire need of heavy investment, (3) the organization lacks enthusiasm and the appropriate level of talent, and (4) the cash flow isn’t sufficient to fund all those urgencies concurrently,” writes Grandet.

What the new Kraft Heinz CEO has to do

A display of Heinz Ketchup in a market in Pittsburgh. (AP Photo/Gene J. Puskar, File)

Grandet says Patricio must take aggressive action if he wants to save the company. The company must invest in a range of $700 million to $800 million over two years to jumpstart sales growth, Grandet believes. Required investments include marketing to drive interest in core brands and in research and development to find the next hot product.

The spending binge part may be one of the easier tasks for Patricio.

Grandet believes Kraft Heinz must “aggressively” sell close to $7 billion in assets and slash the dividend by 50% to conserve cash. If Patricio is unable to pull the trigger on these things, well, it won’t be good. Grandet thinks Kraft Heinz could run out of cash as soon as 2020 at its spending current pace if those assets aren’t unloaded and the dividend isn’t cut.

“What Patricio ultimately does — and how well it works — remains unknown,” Grandet says. “We remain on the sidelines due to the high degree of future uncertainly and the near-term risk of the situation getting worse before it gets better. We could become more negative if we don’t get any meaningful news within the first 90 days.”

Well said.

Brian Sozzi is an editor-at-large and co-host of ‘The First Trade’ at Yahoo Finance. Follow Brian Sozzi him on Twitter @BrianSozzi

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