Unusual Kraft Heinz Options Trading Shows Investors Are Nervous Before Earnings
Unusual volume in currency call options for The Kraft Heinz Company (KHC) today shows that investors may be nervous ahead of their future earnings. Will the company’s free cash flow and FCF margins increase after the CEO rejects the split?
KHC is here $22.11 in midday trading today, it hit a recent high of $23.57 on April 6. But KHC is still up from a low of $21.21 on March 23. However, it could be worth more if its free cash flow (FCF) remains strong.
I discussed this in a Barchart article last month. This was after the CEO made changes and decided to cancel the planned split (March 17, “Kraft Heinz’s About Turnover and FCF Growth Leads to Unusually Large Trading of Call Options.”)
Show me that KHC may have merit $27 per share. This article will review what price targets are.
That target price assumes that Kraft Heinz can maintain at least a 17% FCF margin. That would be even lower than the 18.43% FCF margin generated in Q4.
The reason I use a lower margin is that the capex would be higher. That may come from its drive to transform its operations, which will lower its FCF margin.
So, based on analysts’ 2026 revenue estimates, FCF could rise to more than $4 billion:
$24.44 billion est 2026 revenue x 0.17 = $4.16 billion FCF
And using the metric of a 13% FCF yield, that means its market cap reached $32 billion:
$4.16b FCF / 0.13 = $32 billion market value
That figure is 22% higher than the current market average of $26.155 billion, according to Yahoo! Finance. In other words, the price of KHC (PT) is 22% higher than today’s price:
$22.11 x 1.22 = $26.97 PT
However, for the sake of caution, let’s assume that its FCF margin comes in below 15.85%, as in 2025, as shown by Stock Analysis. But, let’s use the revenue estimate for the next two years, including analysts’ projections of $24.6 billion in 2027 (ie, $24.52 billion for the next 12 months or NTM):
$24.52 billion NTM revenue x 0.1585 FCF margin = $3.886 billion FCF
That’s 6.1% over last year’s FCF of $3.661 billion. So, the average market value is:
$3.886b / 0.13 = $29.89 billion, or +14.3% more
$22.11 x 1.143 = $25.27 PT
The bottom line is that KHC still looks undervalued, from the mid-PT of $25.27 to $26.97.
This is also close to what other commentators have said. For example, Yahoo! Financial survey indicates PT’s estimate of $24.13 per share, while Barchart’s survey price is $23.47.
It all depends on how strong KHC’s upcoming profit and free cash flow (FCF) is for the quarter ending March 31. This is expected to be released on March 6, before the market opens.
It may also be why investors are trading large amounts of KHC call options today.
This can be seen in the Barchart Unusual Stock Options Activity Report today. It shows more than 63x the previous number of call option contracts remaining at the $22.50 strike price that expires on April 24.
More than 13,000 call options traded at 21 cents with a call option strike price of $22.50, which is slightly above today’s price, but actually in the money (ATM).
That means the buyers of this call option believe that KHC could rise above $22.75 (ie, $22.50 +$0.25 ask price) in the next 9 days. In other words, KHC should rise by 2.89%:
$22.75/$22.11 = 1.0289 -1 = +2.89%
That is clearly possible if the company generates strong earnings and FCF for Q1.
However, the heavy volume at this ATM strike price also means that many investors expect KHC to drop here. For example, for short sellers, the yield is:
$0.21 / $22.11 = 0.95%
That’s about 1% over the next 9 days, a reasonably good return. Furthermore, the potential purchase for short sellers is $22.50-$-.21 = $22.29. That’s a little more than today’s price.
The bottom line is, given KHC’s high valuations, if the company generates strong earnings going forward, investors in these calls could make a nice return.
As of the date of publication, Mark R. Hake, CFA did not have (directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is for informational purposes only. This article was originally published on Barchart.com
