Buffett’s top holding, packaged food company Kraft Heinz Co. (KHC, Financial), has tumbled to its lowest price since April last year, though it remains above his purchase price on Friday.
Buffett acquired 325,634,818 shares of the company, representing a 26.7% stake on July 2, 2015. The $28 billion stake consumes 17.2% of his portfolio as his largest position, ranking above other giant holdings in Wells Fargo Inc. (WFC, Financial), Apple Inc. (AAPL, Financial) and Coca-Cola (KO, Financial).
Kraft Heinz’s shares have declined from their February 52-week high of $97.77 to around $78.07 on Friday. The price hovers 1.8% above its 52-week low of $76.76 and approximately 7% above Buffett’s average purchase price of $72.96.
Kraft’s stock has been pressured by broader trends across the consumer packaged foods industry and weak results. Of the nine packaged food stocks in the S&P 500, five saw revenue declines this year, and one remained flat, according to GuruFocus data. All except two, however, reported increased earnings per share. The share prices of all but one also declined by double digits over the past year.
On several metrics, Kraft Heinz ranks high among its peers. It grew EPS 93% over the past year, the second highest in its industry. It also reports the second highest operating margin, at 4.4%, and a lower gross margin growth rate of 1.5%, below four of its competitors.
On Thursday, Goldman Sachs downgraded Kraft from neutral to buy as part of a recalibration of earnings estimates and price targets for companies in the industry, despite Kraft’s strong fundamentals.
“KHC’s earnings growth has outpaced industry peers in recent years as it captured cost savings related to its acquired Kraft asset. Cost savings, however, are beginning to deplete and while we see a path to top-line acceleration for the firm, we expect its magnitude of fundamental outperformance versus the group to Wane,” analysts led by Jason English said in a note Friday they expect the company’s dominance to subside.
The firm also lowered its EPS estimates for 2017, 2018 and 2019 as it expects tighter margins due to headwinds in the industry.
English said his reassessment of the industry was based on FX spot prices, commodity price moves, recent demand trends, 10Q updates and closed mergers and acquisitions in some cases.
In the second quarter, Kraft Heinz reported 1.7% lower net sales from the same quarter a year ago at $6.68 billion, negatively impacted by currency rates. Sales were down in all but one of its geographic segments, with European sales falling the most, declining 4.9%. Only sales in its rest of world segment increased, rising 1.6%.
Net income moved up 50.5% to $1.16 billion and EPS 49.2% to 94 cents per share. The company said it expected to continue its cost savings as it channels the funds to more profitable initiatives.
