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Mark Yu
Mark Yu
Articles (396)  | Author's Website |

Joining Berkshire Hathaway on Its Recent Fumble

A speculator’s case of having bought Kraft Heinz for all the right reasons

December 14, 2018 | About:

Buying Kraft Heinz (NASDAQ:KHC) after its stock price had fallen from its peak earlier this year with an attractive 3.7% dividend yield kicker was a mistake.

Assuming that the company’s share price would, at some point, stabilize and recover due to its stable, positive cash flow and significant investment stakes by both 3G Capital and Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B), was the key to making this mistake.

Despite recording a near 1% decline in its full-year 2017 revenue, Kraft Heinz reported an earnings beat back in March. The world’s largest ketchup and mustard maker also reduced its outstanding debt by $870 million while having provided nearly $3 billion in dividends to its shareholders that year.

To add some confusion, the recent new rule from the Financial Accounting Standards Board made Kraft Heinz’s free cash flow appear $2.3 billion less. In fact, there were no significant events that took place in the company’s operations that could have made its free cash flow drop by this amount.

3G Capital and Berkshire’s $45 billion merger of Kraft and H.J. Heinz in 2015 gave Berkshire 26.7% ownership of Kraft Heinz and 3G Capital a 29% stake.

Fast forward to Kraft’s recent quarter performance: The company reported a nearly 2% increase in revenue compared to its year-ago operations but a discouraging 33% drop in profits due to its annual goodwill impairment testing and higher costs.

Per filings, Kraft recorded a $164 million impairment charge in relation to its goodwill assets in Australia and New Zealand and $101 million impairment loss in Brazil. Without these impairments, the ketchup maker would still have delivered a 5.2% decline in profits brought by higher operating costs.

Investor appetite was presumably further reduced when Berkshire’s partner 3G reduced its stake by 20.6 million shares out of its 291 million shares in August.

Berkshire, meanwhile, has held on to its 325.4 million shares in the Kraft Heinz. Berkshire has valued its Kraft Heinz investment at $17.9 billion or $55 a share at fair value as of September.

This rough estimation reveals that Berkshire is currently down about 12.3% or $2.2 billion on its Kraft Heinz investment.

Nonetheless, analysts see a 3.3% earnings increase and a 0.8% revenue rise for Kraft next year. Experts also chalked in an average price target of $61 per share versus today’s share price of $48.16, indicating near 27% potential upside.

Thinking Kraft Heinz’s stock has seen the worst and speculating that it was due for an early recovery, while supplemented by the presence of investment legends, are now recognizable mistakes in terms of returns.

It would have helped to be patient and to have thought about getting in now instead, especially when Kraft Heinz is at its lowest price since starting public trading, or down about 39% since the start of the year, and yielding 5.2% per share.

One can only average down and hope for the best.

Disclosure: Long Kraft-Heinz.

About the author:

Mark Yu
A doctor in physical therapy (DPT) with a passion for finance. Not a registered financial analyst. Value seeker. Long only. Global investing. Long-term investing.

Attempts to dissect company filings per day. Dislikes goodwill and intangible assets.

For quicker reading--jump ahead to an article's conclusion.

One company (review) a day keeps the speculation (hopefully) away.

Would typically invest $500 to $3000 of own money per buy recommendation.

"The only source of knowledge is experience"

"I have no special talent. I am only passionately curious." Albert Einstein

"To strive, to seek, to find, and not to yield." Alfred, Lord Tennyson

"We find one a year, that's terrific. You do not need a hundred or a thousand great investment ideas to do well. You need a couple. And, the discipline is the most important thing." Warren Buffett

Visit Mark Yu's Website

Rating: 0.0/5 (0 votes)


Valu2day premium member - 3 weeks ago

Hope for the best. This is still a fantastic company. Yes the stock is not performing well. Analysts are souring on traditional food companies with the thought that millenials will shun them. And yes that could be a short term trend that effects earnings in the short run. However, companies like Kraft can and will adapt. Millenials tastes will change as well. I've have watched this cycle repeat in the past. Generics were going to doom the food companies at one point. Dot.com's were going to harm them. The stocks were shunned perhaps as they are being now and that was precisely the time to become interested. Again, most have dominant and well recognized brands that are not easy to replace, but the street will always try to tell you differently. That fact that Berkshire is staying firm also speaks volumes.

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