KHC, APPF, and Tariffs - InvestTalk Caller Questions

Summary

Highlights

• Kraft-Heinz's financial setup is worrying, with declining cash flow and substantial debt, making it a risky 'dividend trap.' 🚩
• Graco shows solid, albeit slow growth, while Graham Corporation stands out with better short-term earnings growth. 🔍
• WW Granger, although fundamentally strong, seems overvalued in the current economic climate. 💼
• Appfolio's earlier strong growth is decelerating, causing its high stock price to seem less justified. 🔍
• Tariffs are creating ripples in transportation logistics, hinting at broader economic impacts and possible recession. 🌍

Key Takeaways

• Avoid 'dividend traps' like Kraft-Heinz, which show misleadingly attractive dividends alongside heavy debt and stagnating growth. 📉
• Graco and Graham offer contrasting growth prospects, with Graham showing more short-term potential despite bigger risks. 🚀
• Be cautious with WW Granger due to its inflated valuation despite strong fundamentals. ⚖️
• Appfolio faces growth slowdowns, making its high trading multiple questionable. 📈
• Tariffs are influencing significant economic shifts, notably in transportation and trade, indicating potential recession signals. 🚂

Overview

Chapters

• 00:00 - 04:00: Kraft Heinz Company Analysis The chapter involves an analysis of the Kraft Heinz Company, identified by its stock ticker KHC. The discussion is initiated by a caller seeking insights about the company's status and performance, specifically mentioning the subsidiary brand Oscar. This sets the stage for a detailed examination of the company's operations and strategy.
• 04:00 - 08:00: Industrial Companies Evaluation The chapter titled 'Industrial Companies Evaluation' discusses the evaluation of a large company dealing in food products such as Meyer, Velvita cheese, Philadelphia cream cheese, Hines Ketchup, and other condiments. Despite being a huge brand with a market cap of $33 billion, the company has a concerning financial profile characterized by a significant amount of net debt totaling approximately $20 billion. Although it offers a high dividend yield of 5.7%, the high level of debt renders its financial standing problematic, making it an unattractive investment option.
• 08:00 - 17:00: Market Benchmark Overview In the 'Market Benchmark Overview' chapter, the discussion centers around the cash flow trends of a company. It is noted that the company's cash flow peaked in 2021 and has been declining since then, though not sharply. The company still generates approximately $3 billion in free cash flow. However, when compared against a $52 billion enterprise value, this results in a low free cash flow yield, particularly concerning for a company with declining earnings and sales.
• 17:00 - 22:00: WW Grainger Investment Analysis The chapter titled 'WW Grainger Investment Analysis' discusses the company's recent financial difficulties, highlighting that revenues last quarter dropped by 6% and earnings fell by 10%. The outlook for the entire year appears grim, with total earnings expected to decline by 15%. Furthermore, analyst projections for both this year and the next year are on a downward trend, which is not promising for the company's financial health.
• 22:00 - 31:00: Impact of Tariffs on Economy The chapter 'Impact of Tariffs on Economy' discusses the speaker's dissatisfaction with the state of debt, illustrated through a chart displaying a strong downtrend. Attempts to reverse the trend have been unsuccessful each time the 100-day moving average is approached, resulting in a bearish setup with expectations for further decline. The narrative revolves around the negative impact of accumulating debt within the economy.
• 31:00 - 41:30: Appfolio and Property Management Software The chapter titled 'Appfolio and Property Management Software' discusses the company's financial health and challenges. It highlights concerns from the market about a potential reduction in dividends, noting that the company has previously cut dividends from 62 cents per share in 2018 to 40 cents and has remained flat since. The chapter also mentions past accounting problems the company faced, which could be a contributing factor to market perceptions.
• 41:30 - 46:00: Closing Remarks and Podcast Information The chapter discusses the concept of a 'dividend trap' in the context of investment, where investors are attracted by dividends but may overlook other financial metrics. It uses an example of a company's return on equity which has been consistently low at around 5% since 2016, suggesting that despite seemingly attractive dividends, the company might not be a sound investment. The speaker expresses a dislike for certain names, possibly titles or terms related to the financial context.

KHC, APPF, and Tariffs - InvestTalk Caller Questions Transcription

• 00:00 - 00:30 This is invest talk independent thinking shared success. Hi, I am calling about Craft Hind company kicker KHC. Uh I was wondering if I could get some insight about this company and what you thought about it. I'll be listening on your program. Thank you for all the good information. Thank you. This is the company that you you think of. We're talking about Oscar. They own Oscar
• 00:30 - 01:00 Meyer, Velvita cheese, Philadelphia cream cheese, obviously Hines Ketchup, and uh all their condiments. And it's a it's a huge company, huge brand, $33 billion market cap. However, the problem here is that they have a large amount of debt, about $20 billion in net debt, and they have a high dividend, 5.7%. But I don't like that debt profile. And
• 01:00 - 01:30 their cash flow has peaked out. It peaked out in 2021 and it's been declining ever since. Not not aggressively to be fair. It does have about $3 billion in free cash flow, but on a 52 billion enterprise value, that's not a very good free cash flow yield, especially for a company whose earnings and sales are
• 01:30 - 02:00 floundering. Last quarter, revenues were down 6%. Earnings were down 10%. And that doesn't look like it's changing this year going forward. Total earnings this year are expected to be down 15%. And analyst estimates for this year and next year continue to go lower. So I don't like the trends here.
• 02:00 - 02:30 I don't like the debt. And the chart is not making me feel all warm and fuzzy either. It's in a strong downtrend. It's been trying to reverse and every time it gets the to the 100 day moving average it fails. And so it's just sitting there in a bearish setup looking to go lower. And when you have that much debt
• 02:30 - 03:00 compared to its market cap, it's the market signaling that this is a company that likely will eventually cut their dividend. and they had some accounting problems before and they've already cut their dividend. Actually, if I look at it, their dividend was 62 cents per share back in 2018. Now it's down to 40 and it's been flat ever since. And like I said, they had some accounting issues, I believe, back in
• 03:00 - 03:30 the day. I just don't like those names. And then you look at profitability return equity only 5%. and it's been hanging out around 5% since 2016. So nearly a decade. So this is a a perfect example of a value trap, if you want to call it that. A dividend trap. This is a dividend trap. That might be a new word I'm going to use a lot. A dividend trap. People look at the dividend and they think that this
• 03:30 - 04:00 is this is all rosy. Oh, a nice 5.7% dividend on this kind of blue chippy type of brand. Let's go for it. The reality reality behind the scenes is very different. It's looks bad straight out. And so I would absolutely sell not buy, you know, it's a better short than than than a than a than a buy. So passing big time on craft times. Unlock valuable financial insights and strategies by signing up for the KP premium newsletter.
• 04:00 - 04:30 Hi Justin or Luke. I'm calling today about a couple industrial companies. Graham Corporation, ticker GHM, and Graco, ticker GGG. Just wondering if you'd hold these companies in today's environment. Let me know if you think I should sell out of them or just keep holding on. Thank you very much. Love the show. Bye. All right, looking at two industrial names. I'll start with the second one first. That was Graco. Manufactur
• 04:30 - 05:00 equipment to move, pump, meter, mix, and dispense fluid and powdered materials. And this is a name that we actually used to own for clients. But we kind of got impatient with it. It didn't really move much. It's was kind of neutral, hanging around this mid80s level. And we held it for a period of time, but couldn't get a clear direction on it and sold it. We like the you like the business but we just found
• 05:00 - 05:30 better use of that capital. So you know if you go look at profitability it is uh it is solid about 20% return on equity and return invested capital. They have pretty much no debt net cash on their balance sheet. Philly good free cash flow around $550 million on a market cap of 13 billion which puts you at about a 3 4%
• 05:30 - 06:00 free cash flow yield. Solid but not amazing. Dividend yield about 1.3% and they're taking that cash flow and they are buying back shares. So, we like the cash flow or the the shareholder yield here. We like the profitability, but the I think the biggest issue is just the growth. There's not a whole lot uh earnings growth this year supposed to be 6% 7% next year and the trends in earnings
• 06:00 - 06:30 growth are coming down as well. So, that was another issue that we had is the the the Yeah. So, so that was the issue with Graco. a fine company but not we we ended up kind of falling out of a love with it. And then Graham Corp manufactures vacuum and heat transfer equipment for the prochemical and oil refining businesses. And this has much better earnings growth. 42% revenue growth uh for for or sorry earnings growth for
• 06:30 - 07:00 this year 16% expected next year. It's much smaller only a $380 million market cap. So, you're taking much more risk than you are with Graco, but you're getting better earnings growth. Now, let me take a look at the profitability here. It's not as profitable. Only 8% return on equity. It has a good balance sheet as well. No long-term debt. Free cash flow though, only about 18 million, but you know, on a market cap of only 380 million, that's not too bad. It's
• 07:00 - 07:30 about a four about a four fourish% free cash flow yield with pretty good growth. The technicals are much better. It has pulled back. Uh but it's it's finding its footing once again. So, if I'm going to pick one or the other, I do think that longer term, Greco just has a more consistent business. But in the near term, as a trade, I would probably go with with with with uh Graham. Both are solid. I I love that fact that both have
• 07:30 - 08:00 a very strong balance sheet and so it just depends on the risk that you want to take as it's more of a trade or a long-term hold. Thanks for the call. Now on Fridays, we generally make time to fit in a quick rundown of some key benchmark numbers. So let's do that right now. The 2-year yield 3.878 that is up from last week which was at 3.836. So up about four basis points and that was after the Fed meeting
• 08:00 - 08:30 and markets are basically anticipating a less doubbish Fed going forward marginally. Now the 10-year yield up to 4.37% that's up about let's see about 5 and a half basis points on the week when it last week it closed at 40 4.314. So once again, rates are going up across the curve. Sometimes in a minor way,
• 08:30 - 09:00 sometimes in a major way. Uh but either way, this is something I'm watching. Are we going to get a break above the 4.5% level on the 10-year, up above 5% on the 30-year? Those are things I'm watching, and that could be a major drag on asset prices. Gold was at $3,337 per ounce. That's an $11 increase from last week. And 78 weeks ago was at $1,935. So very strong move and is in a
• 09:00 - 09:30 strong uptrend. Silver $32.79. That's up about less than a dollar uh $75 from last week, but still up dramatically from about a year ago when it was at 22.80. Oil at $60.94 per barrel. That's a $2.79 increase from last week. So, like I said, even with that OPEC news, it really did okay. And we kind of remained in this range around $60 per barrel, 65.
• 09:30 - 10:00 And I think that's where we'll be before we get some resolution to kind of uh broad demand. And you know, are shale names going to continue to pull back from their capex? And if they do, that's going to put a big floor under oil. Gasoline on average for the country, $3.14 per gallon. That's down 4 cents from last week. And in California, our price is $4.84, a 7% increase compared to last
• 10:00 - 10:30 week. So, we're definitely feeling it more than the rest of the country here. As comparison, Missouri, $2.81 per gallon. That's your average over $2 less than what we're paying here in California. Now, let's keep things moving and play another listener question from 88899 chart. I love the show. Wanted to get your take on WW Granger Incorporated. G as in George,
• 10:30 - 11:00 WW. Just wanted to see if a you thought it was a a good long-term uh investment play. and if so, uh, if you thought it was at a good entry point or if not, what you thought a good entry point would be. Thank you very much. All right, looking at GWW, which is WW Granger, and this is a distributor of maintenance, repair, and operation products for the industrial space. And they have about they have
• 11:00 - 11:30 over 5,000 suppliers. So, suppliers sell into them and then they distribute the products. And they have 300 global branches, so they're worldwide. About a $50 billion market cap, very minimal debt. That's good. Return equity 51%. Free cash flow about 1.5 billion on about a $50 billion market cap. That's about a 3% free cash flow yield. That's not an amazing value from a free cash flow
• 11:30 - 12:00 perspective. And if you look at enterprise value to IBIDA, it's around 18 near the high end of its of its range. And if I'm looking at profitability or profit growth, shall we say, last quarter, revenues are up 2%, earnings are up 2%. This year, earnings are expected to be at 4% and then 10% next year. Although the both of those estimates are trending lower. So that what worries me is that you're paying a pretty hefty multiple
• 12:00 - 12:30 mid20s multiple. is trading over $1,000 per share and if it's only making $40 uh this year, it's about a 2526 multiple. Now, if I look at the chart, it has peaked out recently around 100 $1,200 or so and change. It was in a downtrend going into liberation day, sold off, but it's actually up since liberation day. So
• 12:30 - 13:00 you're seeing some relative strength there, but overall it's in a nice downtrend. And I don't love the technicals. It found support at the 100 day moving 100 week moving average, which historically it has found support. But if you go into a recession, I think this has more downside potentially to go. Now, where would be the price that I would think about picking it up? Let me give you a number here.
• 13:00 - 13:30 Well, then major support would be around $820. $820 per share. That would be the first major support that we get interested in this name. Uh around 700 would be that next level of major support. And there's massive support around 565. So, those are my levels. I do think it gets to 820 and I would start a position there and you know see where we're at economically but I don't love
• 13:30 - 14:00 the trends. I don't like the uh overall valuation here. It does look expensive as we go into an economic slowdown. So um keep it on the watch list cuz it's a great business, great company, great balance sheet, but I'd be patient on picking up Granger till at least 820. Now, let's touch a bit on what Wall Street is looking at when we are trying to decide how much impact these tariffs are having on the overall economy.
• 14:00 - 14:30 Now we look at things like ports, what trucker truck trucker truckers are saying, what railroads are saying in their earnings outlook, what shipping and logistics data is saying in those companies. And the main one, especially because we're dealing with a basically a China embargo, is container imports in LA and Long Beach.
• 14:30 - 15:00 Now, one thing to understand is that going into liberation day, there were an elevated number of containers coming into those ports. For January, there were about 950,000 containers. That's up from the January of 2024 when it was only around 760,000 containers. So about 200,000 more containers just in that one
• 15:00 - 15:30 month. February, the difference was not as stark. It was at about 77,000 containers versus about 74,000. Sorry, 7 770,000 versus 740,000 in February of 2024. And in March there were about 760,000 containers coming into those ports versus the March of last year it
• 15:30 - 16:00 was about 60 680,000. So the big difference was January and but there's still a pretty stark difference in February and March as well. We don't have the full data for April, but we'll be watching for that to see how many less containers there will uh ultimately be, you know, uh to to ship. And we're getting more indicators from retailers. Even though they're stocked up, they are likely to see these imports
• 16:00 - 16:30 impact their sh the shelves sometime in June. Now, China's US bookings declined 60% since April. And overall in the port of LA, imports are expected to fall 35% this week compared to a year ago. And the container ships expected at Southern California ports in the following two weeks expected to be down to about the May 5th week, this is this
• 16:30 - 17:00 week, 43 ships in LA ports. that compares to a range between the lowend 50 and the highend 70 for the past uh basically since uh last summer and we've been in this mid to low 40s since April
• 17:00 - 17:30 23rd. Now, on the trucking side, net orders for heavy duty trucks in North America were down to 16,500 vehicles in March. That's down 5.9% from the same month last year. And it's the highest order cancellation rate in almost 2 years. And if you look at dealer inventory, reached record high levels to 91,600 vehicles in March.
• 17:30 - 18:00 Now, S&P Global has a monthly survey of 27,000 businesses in 40 different countries and it makes up their global supply chain volatility index and that was actually in negative territory in March. So, this takes into account factors like demand for goods, inventory levels, transportation costs, etc.
• 18:00 - 18:30 And we know that it's going to pull back even further due to worsening economic conditions in April. So we'll be watching to see what that number looks like. And then the Dow Jones transportation index and it's underperforming the Dow by 9 percentage points this year. And these are companies that have to do with shipping, railroads, logistics, etc.
• 18:30 - 19:00 That nine percentage points up to this time in the year is one of the worst showings in the past decade. So we continue to look at the reports from companies like JB Hunt, Matson, Night Transportation, etc. And those are the areas that we're focusing on to see what type of real world concrete impact this is having on
• 19:00 - 19:30 businesses and it is profound and it really can't be ignored and that's why I do think that there is a recession but you know it right now what's happening with businesses is they're pausing. One of the big reasons for the rebound in in equities since the low was is actually buybacks. Why? Because they don't want to hire people. They don't want to invest in R&D and capex to build
• 19:30 - 20:00 capacity because there's just too much uncertainty. So what do you do instead? You have money burning a hole in your pocket. You've already approved share buybacks from your board. Buy back shares. Now, the strongest correlation with unemployment is corporate profits. When companies start to see margins shrink, profits shrink, one of the first things they start to do is
• 20:00 - 20:30 actually lay off workers. They haven't felt that in a big way yet, but the longer this stays with us, the more likely these hiring freezes will turn into layoffs. Thanks for joining us. If you found this helpful, please hit the like button and subscribe for more future videos. Now, from time to time, we receive invest questions from the YouTube comment section of our Invest
• 20:30 - 21:00 Talk channel. So, let's tackle one of those questions that just came in. Gil Tel Aviv says, "I'm looking at investing in Appfolio as it seems well positioned to benefit from real estate growth. I'd love to hear your thoughts on the property management software space overall and how Appfolio stacks up against its competitors. APF is the symbol and it is about a seven nearly $8 billion market cap.
• 21:00 - 21:30 Earnings growth is solid although it is slowing down and that's my biggest worry here. I've I've looked at this name over the past couple months and you had revenue growth sorry earnings growth last year of 156%. to $4.377. But this year, earnings are expected to be only $5.18. That's a 19% growth. So dramatic slowdown in growth
• 21:30 - 22:00 here. A year and a half ago, revenues were up 39%. Earnings are up over a,000% year-over-year. But the latest quarter, revenues up 16 and earnings up 15%. solid, but what type of multiple are you going to pay for that level of growth trading at $214 per share? And let's say even though estimates are coming down for next year, let's say it
• 22:00 - 22:30 earns $6 next year. Are you willing to pay 25 times, 30 times? Let's say you're you're going to pay 30 times $6 $6 per share. That puts at $180 per share. It's at 214 today. And those estimates are coming down as they normally do. The farther out you look for at at earnings
• 22:30 - 23:00 estimates, the less faith that you should have in them because they do tend to trend lower. Now, the good thing here is they have a good balance sheet, zero long-term debt, free cash flow is 178 million. That's good. But it also has really leveled out here around 170 million for the past few quarters, which puts it at a free cash
• 23:00 - 23:30 flow yield of only 2 and 12%. Not great. It's profitable. 46% return on equity. That's good. They're starting to buy back shares. I like that. But it's just trading at too high a multiple. Price of sales at 9 and a half. You I always say anything over 10 usually pretty egregious. Enterprise value at 48 times. That's very high. You want that usually
• 23:30 - 24:00 in the teens. And then I look over the chart and this has really not done well over the past year plus. It peaked out around $275 per share and that was back in July of last year. Sold off, found a low around 190. Rallied back up to around that 275. Made a double top slightly lower higher high.
• 24:00 - 24:30 So technically it's in a downtrend. Did I say lower, higher, high? That didn't make sense. A lower high. There we go. And it's been in a downtrend really since last July. It's had a recent sell-off. It's bounced back, but it's trending lower. This isn't a downtrend. This is on its path towards a margin, sorry, a multiple contraction.
• 24:30 - 25:00 And that's why I wouldn't buy it. It would be on my radar because I do like the business and I would like to buy it at a reasonable price. It's just not there yet and I think there's a lot more downside to go. Honestly, I probably wouldn't look at this until 175. There is good support around there. That's that's where things get somewhat interesting, but I don't really love it
• 25:00 - 25:30 until about 140. I would really love it around 110, but you know, I I kind of have to see as how it evolves, how the technicals evolve, how the growth evolves. Does it turn into just a singledigit earnings grower? Then you're getting massive multiple contraction. You probably see the 110 level. So name I would just continue to watch but I wouldn't be buying it right now. Now I'm Justin Klein. This completes another Invest Talk program.
• 25:30 - 26:00 We thank you for listening. We encourage you to tell your friends and family about a free podcast downloads which you find anytime in iTunes, Spotify or Google Play. And if today's show made you think about your own financial picture, your investments, taxes, retirement, and whether it's all really working together, let's talk. At KP Financial, we offer no cost portfolio reviews to help bring clarity and confidence to your financial picture. Just go to
• 26:00 - 26:30 invest.com and click on portfolio review. Over the weekend, visit our new online store. Just go to investalkstore.com. Independent thinking, shared success. This is Invest Talk. Good night. [Music]