Few big-brand stocks have endured the kind of setback that Kraft Heinz (NASDAQ:KHC) has in recent years.

The company that resulted from the merger of its two eponymous food giants has slashed its dividend by 36%, restated close to three years of earnings on the heels of an accounting scandal, and written down $15.4 billion in assets -- including part of the brand value of the Kraft and Oscar Mayer names.

Shares of the food giant are down more than two-thirds from their peak in 2017, showing how disappointing the company's performance has been. 

Despite that unfortunate track record, there are reasons that the stock could be appealing today. Kraft Heinz is backed by some of the most respected firms in the investing world (including Berkshire Hathaway and 3G Capital), it pays a dividend yielding 5.3%, and it owns a trove of globally known brands as well as the distribution to go with it.

Finally, Kraft Heinz is also being guided by a new CEO, Miguel Patricio, who took over last July following the debacle last year that shaved nearly a third off the stock in one day.

Person pushing a shopping cart down a grocery store aisle

Image source: Getty Images.

Less is more

In a recent Wall Street Journal report, Patricio explained that simplifying Kraft Heinz was a key part of his strategy for turning around the business. He said he was aiming for "fewer, bigger bets."

Kraft plans to discontinue some poor-performing product lines, and though Patricio didn't specifically address it, selling some of its brands may be a wise move. That would help shore up its balance sheet since the company has more than $30 billion in debt, and divestitures would help it focus on brands that give it the greatest potential for growth. One of the problems Kraft Heinz has, as Patricio sees it, is that it operates in 56 different product categories, making across-the-board innovation difficult, if not impossible. Selling off product lines and simplifying the business may be the best answer. Procter & Gamble, the household products giant, employed a similar strategy in recent years, and its stock has surged as the company has gotten back to organic growth and an efficient operating structure.

Kraft Heinz remains highly profitable, and Patricio indicated that the company would be willing to sacrifice profit for growth. 

Plenty of challenges

Though Kraft Heinz and Procter & Gamble have a number of similarities, including a long history and broad portfolio of age-old, global brands, Kraft Heinz competes in a more difficult sector than P&G.

Today, many legacy food brands are struggling, including General MillsKellogg's, and Campbell's Soup, as changing consumer habits favoring organic brands and fresh foods have made it difficult to grow sales. For Kraft Heinz, many of its brands, like Jell-O, Velveeta, and Maxwell House, seem hopelessly dated.

The company's balance sheet also looks weak, with about $30 billion in debt, a current ratio barely above 1 (which could cause a liquidity crunch down the road), and $85 billion in intangible assets that could be at risk of a writedown following the $15.4 billion impairment a year ago. It also spent more on dividends than it generated in free cash flow for the first three quarters, giving it a payout ratio of 104% and putting it at risk for another dividend cut.

Meanwhile, profits are falling quickly. Through the first three quarters of 2019, profits fell in all of its regions, and adjusted earnings per share dropped 20% in that period to $2.13. It's lost nearly $1 billion in adjusted EBITDA during that period as well, with organic sales down 1.6%. And analysts expect profits to continue to slip in 2020.

All that adds up to a daunting set of challenges for Kraft Heinz. A bold plan and some asset sales could spark a recovery in the stock, but the macro challenges in processed foods combined with a bloated balance sheet, shrinking profits, and an uninspiring track record make Kraft Heinz a stock best left alone for now. Though it may look a value play for now at a P/E of 10.2, it could have more room to fall as the number of negative catalysts outweigh the positive for now. For income investors and others, it's simply not worth the risk.