The price of WTI crude oil has risen nearly 75% this year. Most of that spike occurred over the past two months, as the Iran War curbed oil shipments through the Strait of Hormuz. Those rising oil prices boosted the margins of big oil companies, but they crushed the margins of other companies that depend on oil, natural gas, and related chemical products.
Those headwinds are particularly tough for packaged food companies already operating on thin margins in commoditized markets. Rising natural gas prices are driving up fertilizer prices, while higher oil prices are making it more expensive to run tractors, harvesters, and other farming equipment. Those crops also become more expensive to ship, and the plastic packaging for those finished products -- which comes from petroleum -- becomes pricier to manufacture.
Image source: Getty Images.
Rising gas prices are also driving consumers to rein in their spending on many discretionary packaged food products, so these companies can't aggressively raise their prices to pass along rising input costs. In other words, it's not a great idea to invest in older packaged food giants like Kraft Heinz (KHC +2.07%) or General Mills (GIS +1.03%) right now.
How badly will Kraft Heinz and General Mills suffer?
Kraft Heinz and General Mills were already grappling with similar long-term challenges before the Iran War drove oil prices to multi-year highs. Both companies faced intense competition from local, health-oriented, and cheaper private-label brands at supermarkets. They initially raised their prices to offset those slower sales and counter inflation, but that balancing act failed over the past year as their aggressive price hikes drove away too many consumers.
NASDAQ: KHC
Key Data Points
Kraft Heinz and General Mills had also "di-worsified" their portfolios by gobbling up too many weaker brands over the years. Moreover, they focused too much on cost-cutting initiatives and buybacks rather than on developing new products or launching new marketing campaigns. Both companies are now trying to divest those weaker brands to streamline their businesses, but those divestments will likely reduce their near-term revenues.
NYSE: GIS
Key Data Points
For 2026, analysts expect Kraft Heinz's adjusted EPS to decline 22%, while General Mills' adjusted EPS is expected to drop 19%. So while Kraft Heinz and General Mills might initially seem cheap at 11 times and 10 times forward earnings, respectively, they both deserve those discount valuations because they face too many near-term challenges.
Even if the Iran War ends and oil prices decline, Kraft Heinz and General Mills will still need to prove their business models are sustainable. Until that happens, both stocks will likely underperform the S&P 500 and other better-run blue chip consumer staples companies.
