Kraft Heinz underperformed during the past quarter and throughout the year as tough conditions in the traditional branded food industry – primarily negative volume growth, as well as pricing pressure from retail customers intent on giving away their profits to chase market share – weighed on the company’s results. Furthermore, investors have been itching for the Company to execute another major acquisition, and this failed to materialize in 2017, although the Company did make an ultimately abandoned approach for Unilever early in the year. We have been impressed, during our ownership of Kraft Heinz, with management’s ability to cut costs and to improve margins at the businesses it has integrated, but, with over $1.5 billion of cost savings already behind us, and with volume growth nowhere to be seen, we believe we need to see a major acquisition to drive the stock meaningfully higher.
We believe the company remains active in its pursuit of acquisitions, and this would seem to be an ideal environment for buying, between still-low interest rates, relatively lower valuations across the Consumer Staples sector, and nearly limitless available liquidity between Kraft Heinz and its co-sponsors, 3G and Berkshire Hathaway. We believe acquisition integration and operational and financial improvement are core strengths of the organization, and we would be positively biased toward any acquisition. With all of this in mind, we did trim our position in the stock throughout the year, particularly as we saw the stock bouncing off of all-time highs while the fundamental performance of the company, in terms of volume/revenue/profit growth, was struggling. In the most recent quarter, we were relieved to see underlying organic performance improve somewhat, but we continue to believe the growth we require will only come from a continuing acquisition strategy, and we are monitoring this situation closely.
From David Rolfe (Trades, Portfolio)'s fourth quarter 2017 shareholder commentary.
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