Kraft Heinz (KHC +2.51%) is a top food company with many strong brands that customers consume every day. It's the strength of these well-known products that has allowed the company's financials to remain resilient during tough times.
Earlier this month, the company reported its latest earnings numbers, which confirmed Kraft's strong moat and why this a stock investors should feel comfortable owning for the long haul.
Customers aren't flinching at price increases
On May 3, Kraft reported results for the first quarter ended April 1. What stood out to me was not that the company was able to achieve positive year-over-year revenue growth as many businesses have, but just how little change in volume there has been despite rising prices. Typically, you would expect a business to see sharp declines in volume, which would offset higher prices, but that hasn't been the case at Kraft.
Here's a look at the company's organic growth rate (which excludes the effects of foreign exchange) and the impact price and volume had on its results in Q1:
| Segment | Organic Growth Rate | Price Impact | Volume Impact |
|---|---|---|---|
| North America | 6.7% | 13.2% | (6.5%) |
| International | 18.1% | 19.3% | (1.2%) |
| Total company | 9.4% | 14.7% | (5.3%) |
Data source: Company's Q1 earnings release.
Achieving a near double-digit organic growth rate is impressive given the significant price increases Kraft has been making recently. According to its results, price increases boosted revenue by 14.7% in Q1 versus a year ago. Although volume did decline by 5.3%, that was relatively minor. It's especially true in the company's international operations, where there was barely a 1% negative impact on volume despite some mammoth increases in price.
By increasing prices, the food company is also able to support its margins. While Kraft's operating margin has still been declining in recent quarters as a result of inflation, it remains fairly strong at close to 20% of revenue.
KHC Operating Margin (Quarterly) data by YCharts
A wide moat makes it a strong stock to hold
Kraft's strong sales growth suggests that switching from its brand-name products down to the private label isn't all that easy for consumers. Sacrificing taste for a difference that may only amount to a few dollars may not be worth it, especially for a product like ketchup that consumers may use on a daily basis.
What it boils down to is moat, a wide competitive advantage that Kraft enjoys and that enables it to raise prices without seeing a big detrimental impact on earnings. Brands such as Philadelphia, Jell-O, and Oscar Mayer are all well known and even with price increases, those products may not be so unaffordable that customers are willing to trade down to a generic label.
NASDAQ: KHC
Key Data Points
Having pricing power is what billionaire investor Warren Buffett says is "the single-most important decision in evaluating a business." It's no surprise that Kraft is one of the top holdings in the Berkshire Hathaway portfolio.
A great option for buy-and-hold investors
Since the start of 2022, shares of Kraft have risen by 14% while the S&P 500 has declined by 13%. And with the stock trading at less than 15 times its future earnings (which are based on analyst estimates), it's still trading at a lower valuation than the average stock on the S&P, which averages a multiple of over 18.
When combined with an above-average dividend yield of 3.9%, there are plenty of reasons to invest in this stock right now. Kraft's business is doing well and while a recession may be a bumpy ride for many investments, this can be one of the better ones to be holding in your portfolio.
