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Jonathan Poland
Jonathan Poland
Articles (505)  | Author's Website |

Kraft Heinz: Warren Buffett’s Biggest Mistake?

Berkshire's investment is down significantly since the merger

August 14, 2018 | About:

The Kraft Heinz Co. (NASDAQ:KHC) has an incredible lineup of food brands. From cheese to hotdogs to peanuts and the condiments that make food more flavorful.

The problem is that its stock hasn’t followed suit. In 2015, Berkshire Hathaway (NYSE:BRK.A)(BRK.B) had over 325 million shares as the Kraft Heinz merger created the third-largest food and beverage company in North America (behind PepsiCo and Nestle), and the stock became one of Berkshire’s largest holdings. Unfortunately, after initially moving higher from $70 to over $90 a share, the stock has retreated, and Buffett is down about $3 billion.

The deal, H.J. Heinz Co. buying Kraft Foods Group Inc., was supposed to create a food and beverage giant that could better compete in a world of evolving consumer tastes. Both companies have struggled with the lower demand in processed food. However, since then, while the company has tightened its belt to help it release more profit for dividends, sales are flat. The company once had a strong durable competitive advantage, but it is now struggling to grow. And, for a business of this size, growth equals survival.

Beyond its namesake brands, the combined firm's portfolio includes Oscar Mayer, Planters, Ore-Ida and Philadelphia, with each delivering a steady stream of cash flow. Yet, like many big conglomerates, it’s more focused on efficiency gains rather than producing some new product that will delight consumers.

Results have remained a mixed bag. Organic sales declined 1.5% during the first quarter as more grocery chains get aggressive on the pricing front, and American consumers increasingly shun processed foods in favor of healthier, fresher foods. The company will continue to get lean and produce better earnings per share numbers from a net profit standpoint. But, the time when processed foods were dominant industries is over.

It plans to step up its marketing efforts, with the hopes of stabilizing downward trends across some of its largest categories, including condiments, cheese and cold cuts, but for 2019, the earnings estimates are $4.15 a share, which at 15x only get the price up $3 points and still a long way from where Berkshire owns it.

Granted, Buffett shouldn’t get hurt too badly as long as Kraft Heinz continues to produce earnings that can pay out higher and higher dividends. This investment is not on par with Dexter Shoes, and the stock doesn’t have to produce double-digit gains for the company to be worth owning for Berkshire.

The problem is that Kraft Heinz is looking to become more entrenched, and if it actually attempts to buy Campbell Soup (NYSE:CPB), it’ll only be to pad the dividend. The combination of these companies may create certain “synergies” but long-term, Kraft Heinz shareholders will be worse off thanks to the amount of debt it will be carrying. Plus, with the company’s cost-cutting initiatives only ramping up, it’s not going to have the cash to spend on developing meaningful new products either.

Buy this one for the dividend only, not because you think shares look discounted. They aren’t. The stock growth will not beat the S&P 500 going forward, even at this price.

Disclosure: I am not long/short any stock mentioned in this article.

About the author:

Jonathan Poland
I spent more than 15 years helping DIY investors earn over 30% a year. Today, I help business leaders take those insights and build better assets. I rarely write about stocks that I own. Thanks for reading. Do your own analysis before investing.

Visit Jonathan Poland's Website

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