The maker of Jell-O, Oscar Mayer hot dogs and Kraft macaroni and cheese may need to switch up its menu.
Kraft Heinz sideswiped Wall Street with, starting with a huge loss from the writedown of $15.4 billion in assets. The food conglomerate added to the distasteful mix with the disclosure of a U.S. Securities and Exchange probe into its accounting.
“This is stunning, and one of the key reasons is this is the kind of company that you not expect these kind of surprises to come from,” Jon Baumunk of San Diego State University’s Fowler College of Business, told CBS MoneyWatch.
Unlike a technology startup, investors generally look to a consumer staples company for stable earnings and growth, said Baumunk, who teaches financial accounting and accounting ethics.
The surprises sent Kraft Heinz shares tumbling 27 percent to a record low of $35 on Friday, erasing more than $16 billion in market value for the company created in a 2015 merger directed by Warren Buffett and private equity firm 3G Capital.
The company’s CFO, David Knopf, told an analysts’ call Thursday that the company conducted its own investigation after learning of the SEC investigation and determined it should have recorded $25 million in prior periods instead of the fourth quarter.
“To put into context, that compares to our overall procurement spend of over $11 billion, which excludes big four commodities spend,” Knopf said.
The accounting trouble is not material, but does raise questions, according to Baumunk. “Management’s credibility is really the issue,” the educator said. “What else might be out there, are we going to get any other surprises?”
Buffett’s Berkshire Hathaway and 3G Capital bought Heinz in 2013, and since merging with Kraft, has busied busied itself with cutting costs.
Two years later, Kraft Heinz tried and failed to acquire Unilever for $143 billion in a deal that might have allowed it to continue cutting costs and increasing margins, analysts said. Now, if Kraft Heinz was banking on buying another company to feed its growth prospects, that avenue may not longer be available.
“We have been bullish on KHC for its role as a likely consolidator in packaged food, but now believe we likely were overly optimistic in both its likelihood of getting a sizable deal done and of the quality of the growth profile for any ensuing company,” Piper Jaffray analyst Michael Lavery said in a client note Friday.
While the company signaled its eagerness to participate in industry consolidation — another way of saying buy more assets — investors would instead prefer management fix its own house before buying another, JPMorgan Chase analyst Ken Goldman said in a client’s note.
“It is more than fair to ask if any fundamental value for 3G [Capital] has been created since the Kraft Heinz merger,” Goldman wrote.
Both analysts downgraded the company.