Why Shares of Kraft Heinz Co. Rose 11% in October

By Asit SharmaFool.com

Image source: Kraft Heinz Co.

What:Shares ofKraft Heinz Co.rose 10.5% in the month of October, according to data provided byS&P Capital I.Q.

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So what: Company stock edged up steadily during the month in anticipation of the entity's first reported quarter of earnings. The merger of packaged goods giant H.J. Heinz Company with Kraft Foods Group, the former grocery business of Mondelez International, was consummated at the beginning of the third quarter, on July 2.

Part of the buying interest in Kraft Heinz was undoubtedly driven by the lure of Warren Buffett as a major shareholder. Through Berkshire Hathaway, Buffett owns approximately 27% of the merged company.

Did the October buildup pay off for shareholders? Kraft Heinz released earnings on Nov. 5, and results ran counter to investor anticipation. On a pro forma basis, company revenue declined 9%, and earnings shrank to a $168 million loss, versus a Q3 2014 profit of $428 million.

Like peer Mondelez and many other fellow consumer goods conglomerates, Kraft Heinz was hit by foreign currency headwinds due to the strength of the U.S. dollar against major global currencies. Management attributed its proforma revenue decline to a 6.7% currency drag. But it should be noted that organic revenue (revenue after adjusting for the impacts of currency) also declined during the quarter, by 2%.

Kraft Heinz gets about 29% of its sales outside the U.S. Thus, it's actually a little better insulated than many of its competitors from a raging greenback. For example, Mondelez's most recently reported quarter shows a revenue concentration of approximately 75% outside of North America. So, why did foreign currency effects weigh so pronouncedly on Kraft Heinz's results?

After the U.S., the company breaks its business results into three major segments which are roughly equal in revenue: Canada, Europe, and "rest of world." The Canadian dollar has sunk precipitously over the past year against the U.S. dollar, and the euro has also depreciated significantly during this time period. And as many multinationals have already reported this earnings season, Latin American currencies (and, in particular, the Venezuelan bolivar) continue to weigh on results from that region in 2015.

To cite one illustrative example, Kraft Heinz reported a 32.4% negative impact on revenue in its rest-of-world segment from foreign currency effects and cited Venezuela alone for nearly 13 percentage points of that top line drag.

Now what:The lackluster results reported early this month have caused Kraft Heinz stock to give back most of its gain from October -- the new "KHC" ticker is down roughly 8% so far in November. But with a portfolio of 8 "billion dollar plus" brands, which includes names like Oscar Mayer and Velveeta in addition to Kraft cheese and Heinz ketchup, the merged entity has top tier assets to work with. Investors on the sidelines may want to exercise patience and wait a few quarters for the merged entity to achieve projected synergies; it's likely just a matter of time before Kraft Heinz begins to exhibit top and bottom line growth.

The article Why Shares of Kraft Heinz Co. Rose 11% in October originally appeared on Fool.com.

Asit Sharma has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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