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Rupert Hargreaves
Rupert Hargreaves
Articles (1261)  | Author's Website |

Warren Buffett: Kraft Heinz Is a Good Business, but the Price Was Wrong

Sometimes you can overpay for a great business.

May 08, 2020 | About:

Every investor makes, even Warren Buffett (Trades, Portfolio). The Oracle of Omaha has made several errors throughout his career, and he is not afraid of talking about them at length.

As regular readers of my articles will know, I like to spend more time reviewing these failures than Buffett's successes. The reason why is simple - we can learn far more from losses than from wins. Studying what we wrong, why it went wrong and what Buffett did when the mistake emerged can tell us far more about investing than just following his successful investments.

One of Buffett's biggest failures

In my view, one of Buffett's biggest failures in recent years is Kraft Heinz (NASDAQ:KHC).

In some respects, this is not a complete failure. The company is still producing profits and owns a portfolio of strong brands. The maker of Heinz tomato ketchup and Kraft Macaroni & Cheese reported sales of $6.2 billion in the first quarter of 2020.

However, the business is struggling, and Buffett has said that he would have sold the stock if he could. In an interview with Becky Quick at the beginning of 2019, when asked if he would be selling, Buffett said:

"We can't as a practical matter move around tens of billions of dollars that easily. But beyond that I mean, if we're working with a million dollars or $10 million, would I have a position in it?

No. You can move around with a million or $10 million. And Ted and Todd can move around reasonably well with $13 billion. But that can be difficult. $173 billion, I mean, you dance like an elephant. Not like some guy on 'Dancing With the Stars.'"

However, earlier in the interview, Buffett seemed to suggest that the business is attractive as an enterprise. It was the price that was the problem. He reaffirmed this viewpoint at the 2019 annual meeting of Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) shareholders.

When Carol Loomis asked Buffett about the holding on behalf of a Berkshire shareholder from Germany, Buffett replied:

"The Heinz part of the transaction, when we originally owned about half of Heinz, we paid an appropriate price there. And we actually did well. We had some preferred redeemed and so on.

We paid too much money for Kraft. To some extent, our own actions had driven up the prices."

He went on to explain that the business itself is a "wonderful business," as it was set to earn $6 billion of pre-tax profits on tangible assets of $7 billion. However, "you can pay too much for a wonderful business," the Oracle of Omaha went on to add:

"We bought See's Candy. And we made a great purchase, as it turned out. And we could've paid more. But there's some price at which we could've bought even See's Candy, and it wouldn't have worked. So, the business does not know how much you paid for it."

Don't pay too much

This lesson is something every investor should consider before making an investment. It's very easy to overpay for a business. Even if it is a great business, paying too much can quickly erode the investment case.

The hard part is working out how much the enterprise is worth. That's why it's vital for every investor to do their own research and valuation work. Any analyst or other investor can make a case to justify why a stock looks cheap, but if you're the one buying, you need to be comfortable that you're buying at the right price.

Even if you make a mistake, you can at least look back at your work and see where you went wrong. The best investors continually review their work. Buffett's analysis of Kraft Heinz is an excellent example of that.

Disclosure: The author owns shares in Berkshire Hathaway.

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About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

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