Kraft Heinz (KHC) left investors shocked after reporting a major loss in Q4 2018. The company also released an investigation into the SEC in its accounting practice. Several fearless investors were offered to buy a fall, but we are not sure. Indeed, the world's largest food and beverage company can even eliminate the stomachs of investors. A more thorough study of both disclosure and SEC investigation suggests that things may be worse than they seem to be.
Not on an average question
On the basis of its size, the attention of the writing of Kraft Heinz deserves attention. At $ 1
But the size here is not a problem. The reason for this writing is so unusual that it seems to have come from virtually no place. Kraft Heinz regularly evaluates its various departments, including annual degradation tests. This leads to a fairly regular recognition of the goodwill impairment, and an accompanying adjustment to the balance sheet.
Kraft Heinz traditionally holds the main impairment test for the second quarter of each year, and 2018 was no exception. When the company reported its third-quarter earnings, it recognized significant depreciation costs:
"We test goodwill for impairment at least annually in the second quarter or when there is an initiating event. We conducted our annual impairment test for 2018. As a result our annual impairment test in 2018, we recognized a cashless impairment loss of US $ 164 million in the statement of general and administrative expenses associated with our reporting unit in Australia and New Zealand. For the reporting entity, up to $ 509 million was included in the impairment charge. In addition, out of our 20 reporting units, there was an excess of a fair value that exceeded its book value of less than 10%. Units amounted to $ 4.7 billion. For the Canadian retail, $ 424 million for Latin America exports, $ 407 million for North East Asia, $ 326 million for Southeast Asia and $ 232 million for other Latin American countries.
From "Of the 20" of their reporting units, apparently, they have a significant redundancy, there is always a chance that everything can get worse I. But in order for the situation to change so dramatically in less than half a year, it is shocking. It's clear that Kraft Heinz either got out of blue, or until now it was uncomfortable to recognize the true extent of violations. Although the company may try to confirm the certainty that this one-time adjustment, the fact that it was not a telegraph – and was caused in such a short time – should be considered a serious red flag and a warning sign that it can not be
SEC digs in books
Recording is not the only one that has blinded investors this week. Kraft Heinz also said that his accounting practices fell under the SEC and received a call from the regulator. The company said it began its own internal investigation in response to an SEC investigation, recording an additional cost of $ 25 million:
"Following this first SEC request, the company, together with external lawyers, opened an investigation into procurement, in the fourth quarter of 2018 , as a result of the investigation, the Company has fixed a $ 25 million increase in the value of the product sold as a fix beyond the period since the Company has determined that the amounts were insignificant By the fourth quarter of 2018, the Company is in the process of introducing certain improvements in internal control in order to reduce the likelihood that it will take place in the future and has taken other measures to remedy the situation.
Although the investigation of the SEC is not something the investor wants to see. However, Kraft Heinz sounds like he does everything right: collaborating, launching an internal investigation, promptly acknowledging cost adjustments, and promising new controls to prevent bugs from repeating. So far.
But again, there is more to this story if we dig a little deeper. According to its own chronology of the events of the company, it would seem that the SEC may have been sniffing around for reasons other than $ 25 million. Audit Analyst, a specialized research company, concludes that this story is far from complete:
"In other words, there is another unresolved issue that led to the consideration of SEC.
If for the investigation of the PDC, which certainly did not end , there may be even more unpleasant surprises.
Kraft Heinz 27.5% on Friday against the background of many analyst ratings.For violent reaction to the market, as a rule, makes us sniff the opportunity to buy. in this case, we suspect that there may be more troubles.
The main business has obviously taken a serious blow: the myopic drive to reduce costs has led Kraft Heinz to lose focus on maintaining their brands, even when consumer tastes continue to change, and its current brands are not able to resonate with new generations of consumers. In the meantime, he has not seen success in introducing new and profitable claims.
Kraft Heinz has promised to return to strong revenue growth and margin improvement, focusing on improving its brands, reaffirming its position on market and creating new opportunities. Given the rapid development of the consumer market, these promises seem somewhat dubious.
And even if the company adheres to its operational promises, other issues remain. A further deterioration of the brand may lead to a decrease in stock prices, and, given the last surprise, there is little reason to be sure that this was the last significant mark on the cards. Investigation of the PDC causes even more red flags. This is a big question mark, and Kraft Heinz has not yet done enough to dissipate investors' fears.
Although investors may think that this fall is worth buying, we will keep aside until we get more clarity about the long-term company.
Disclosure: I / we do not have positions in the mentioned shares and I do not plan to initiate any positions within the next 72 hours. I wrote this article myself and it expresses my own thoughts. I do not receive compensation for this (except for Seeking Alpha). I do not have any business relationship with any company whose shares are mentioned in this article.