Kraft Heinz (NASDAQ:KHC) burned lots of investors over the past year as it struggled with slowing growth, contracting margins, big writedowns on its top brands, a dividend cut, an SEC probe over accounting issues, and delayed SEC filings.

A CEO change in July sparked flickers of hope, but the packaged food giant's first- and second-quarter reports in August (which were released simultaneously due to filing issues) disappointed investors with ongoing revenue declines. Kraft's second-largest investor, 3G Capital, subsequently sold over 25 million shares in October.

A shopper puts a bottle of Heinz ketchup into a basket.

Image source: Getty Images.

All those setbacks indicated that Kraft wasn't ready to rebound from its all-time lows yet. However, the stock recently rallied sharply after the company posted its third-quarter numbers. Does that sudden interest indicate that Kraft is finally out of the woods?

The key numbers

Kraft's total revenue fell 4.8% annually to $6.08 billion, which missed expectations by $50 million. Its organic sales dipped 1.1%, marking its third straight quarter of negative growth but beating expectations for a 1.6% drop. Its adjusted EBITDA declined 7.8% to $1.47 billion, but still beat expectations by $80 million.

Its non-GAAP earnings declined 9.2% to $0.69 per share, also clearing estimates by 15 cents. Its GAAP earnings, which were skewed by impairment charges a year earlier, rose 48% to $0.74 per share.

Metric

Q3 2018

Q4 2018

Q1 2019

Q2 2019

Q3 2019

Organic sales (YOY)

2.6%

2.4%

(2.8%)

(0.3%)

(1.1%)

Adjusted EBITDA margin

25%

24.7%

24%

25%

24.2%

YOY = Year-over-year. Source: Kraft Heinz quarterly reports.

Those numbers were mixed, but the bulls seemed impressed by Kraft's better-than-expected organic sales and EBITDA. Kraft's organic sales dropped 1.6% in the U.S. and 0.5% in Canada, but improved slightly in Europe and the rest of the world. Its total organic sales also improved slightly on a sequential basis.

On a constant currency basis, Kraft's adjusted EBITDA only fell 4.5% in the third quarter, compared to a 16% drop in the first half. These improvements indicate that Kraft's declines could finally be bottoming out.

The key improvements

Kraft's former CEO Bernardo Hees tried to revive the company's organic sales growth by slashing prices. That move backfired and crushed its margins. By comparison, General Mills (NYSE:GIS) wisely raised prices to offset its declining shipments, which shielded its margins and earnings growth.

A shopping cart in a grocery aisle.

Image source: Getty Images.

During the conference call, Kraft's new CEO Miguel Patricio stated that the company was "developing a road map for price, mix, promotion and trade improvements," which would presumably be released in the near future.

CFO Paulo Basilio noted that Kraft's "pricing turned from negative in the first half to positive in the quarter" as it implemented price hikes in the United States, EMEA (Europe, Middle East, and Africa), and Latin America to reverse Hees' price-slashing strategy. However, Basilio noted that its pricing power remained weak in Canada.

Basilio noted that Kraft's margins would still face several challenges over the next few quarters, including supply chain costs, commodity inflation, and price volatility in cheese and meats. Competition from smaller, healthier brands and private labels like Costco's Kirkland could exacerbate that pain.

Basilio stated that Kraft was raising prices and developing new products to counter those challenges, but that the "reaction in the market remains unclear." He also noted that Kraft would continue to focus on boosting its EBITDA on a constant currency basis via supply chain improvements, divestitures, and other cost-cutting measures -- but investors should recall that Kraft struggled to sell some of its withering brands over the past year.

The road ahead

Kraft didn't offer exact guidance for the fourth quarter. However, Basilio stated that its year-over-year revenue and earnings growth would be "generally similar" to its third-quarter growth rates. He noted that although the company beat Wall Street's EBITDA and EPS expectations during the third quarter, it still expected both figures to decline annually during the fourth quarter, which suggests that Kraft isn't out of the woods yet.

Analysts expect Kraft's revenue and earnings to drop 4% and 25%, respectively, this year, followed by milder declines next year. That's why it's still difficult to call Kraft -- which trades at 12 times forward earnings and pays a forward yield of 5.7% -- a safe value play.

Investors looking for a decent dividend play in the packaged foods market should consider buying General Mills instead. It's slightly pricier at 15 times forward earnings and pays a lower forward yield of 3.9%, but it generates much more stable growth.