Alternative Valuation

ROPI

The Residual Operating Income (ROPI) Valuation Model starts with the computation of Net Operating Assets (NOA), derived from the company´s aggregate assets, adjusted for operating leases and excess cash, and subtracted by its operating liabilities. The Weighted Average Cost of Capital (WACC) used to discount the cash flows remains the same as the prior post at 8.91%. This model incorporates a calculation for the break-even Net Operating Profit After Taxes (NOPAT), presenting the profit necessary for the KHC to meet its capital demands. The ROPI Baseline resulted in a negative figure, indicating that KHC failed to generate sufficient returns to reach its break-even point. 

For the growth rate, I used the parameters set in the Free Cash Flow (FCF) Valuation Model, with a 0.5% revenue growth rate starting from 2033. This projection is based on both qualitative and quantitative analysis, suggesting a slow but constant decline in sales over the upcoming years. 

Another assumption for the baseline ROPI involved is that I used the most recent year's ROPI data, as for previous years KHC has an exceptionally high and negative ROPI. This is likely because of the pandemic's impact on the company's expenses and the decline in KHC's NOA during the past years, mixed with the reduction in revenue generation from KHC assets, in consequence yielding a considerably lower ROPI. 

The final key assumption in this ROPI Valuation is the amount of existing shares which for this day is 1.226 million outstanding shares. Dividing this by the firm’s equity value results in a valuation of $25.63 per share, indicating that the stock has been relatively overvalued given its current market price of $35.36.

The FCF valuation model exhibits nearly a $10 difference, meaning that the negative ROPI significantly influenced the final valuation of the company at $25.63 per share.

Figure 1: ROPI Valuation Model of KHC

Dividend Discount Model

In constructing the Dividend Discount Model (DDM) as a secondary valuation alternative, the first assumption involved is determining the dividend payout by Kraft Heinz (KHC) to its shareholders. As of November 30, 2023, KHC's latest dividend distribution was at $1.60. The next assumption is the used growth rates, which are identical to those applied in both the Free Cash Flow (FCF) Valuation and the Residual Operating Income (ROPI) Valuation models. 

The next step was the calculation of the terminal value of the cash flows. Following this, it was needed to include the cost of equity to compute the Net Present Value (NPV) of the cash flows and, the final stock price. The cost of equity was computed based on prior posts, using a risk-free rate of 4.52% (reflective of the 10-year government bond yield), a beta of 0.77 sourced from FactSet, and a Market Risk Premium (MRP) of 5.70%, as reported by Statista. 

After calculating the NPV of the Terminal Value, the result valuation of KHC stock, based on its dividend payouts, was computed at $19.66. This valuation, which is lower than the ROPI valuation, further confirms the overvaluation of KHC stock, marking yet another valuation alternative that indicates an inflated market price for KHC.

Figure 2: Dividend Discount Model of KHC

Market Multiple Valuation

The third and final alternative valuation employed was the Multiples Valuation Method. In this approach, I selected four primary competitors for comparison: Unilever, General Mills, Nestle, and Campbell Soup Company. These companies were chosen based on their direct relevance to my team throughout the semester. Each of these corporations operates within the same industry as Kraft Heinz (KHC) and presents direct market competition, offering a similar variety of products and comparable business models within the industry. It is also important to mention that Unilever and Nestle trade through an ADR, meaning that they are foreign companies. 

After identifying these main competitors, the next step involved is finding the necessary metrics to compute the multiples. These metrics were found from Value Line and Factset. It is important to note that during this valuation, certain outliers were excluded to maintain the integrity and relevance of the ratios. 

The figure below outlines the calculations of all different multiples. One key assumption is the exclusion of two primary outliers and the Price Book Ratio, which was significantly higher compared to its competitors. The three multiples utilized to determine KHC’s valuation were Price to Sales, Market to Cash Flow, and the Price-Earnings (PE) Ratio. The industry averages of these three multiples were then calculated to find a final stock price. 

The conclusion of this Multiples Valuation Method resulted in a valuation of KHC at $47.20 per share. According to this methodology, KHC appears overvalued relative to its peers. 

Figure 3: The market multiple valuation calculation is shown below.