Pay 54% Less Than Buffett For Iconic Stock

When Warren Buffett first started to snap up shares of Kraft Heinz in 2013 and closed a deal to acquire 26.6% of the firm in 2015, it seemed like a masterstroke from the Oracle of Omaha.

Kraft Heinz (NASDAQ:KHC) had all the elements, it seemed, that Buffett favored from a wide economic moat to beloved household brands. Whether you’re sipping Maxwell House coffee, or spreading Philadelphia cheese on a bagel, Buffett would be earning more than a quarter on each dollar of profits.

But what seemed like a prescient move to own some of the most iconic brands in America, such as Heinz ketchup, led to shareholder disaster and a multi-billion dollar write-down within a few short years.

In retrospect, it appears Buffett heavily mis-calculated the financials and the fortunes of Kraft Heinz, and later admitted to substantially overpaying for it.

For the famed investor who started out buying good companies at great prices, and evolved to buying great companies at fair prices, it seemed as if he had glanced over the pricing consideration to the chagrin of Berkshire Hathaway investors and indeed himself.

Almost a decade later, and remarkably Buffett’s purchase price appears to be still substantially higher than where KHC is trading now, close to $35 per share. It is believed that Buffett’s average price per share at which he snapped up Kraft Heinz was $75.48 per share.

That poses a rare question for investors today, is it possible to buy up a big holding of Buffett’s at a substantial discount to the price he paid? And if so will KHC ever bounce back?

Key Points

• Warren Buffett’s investment in Kraft Heinz led to substantial losses and a major write-down due to an overestimation of the company’s value.
• Kraft Heinz remains a notable 3.8% of Berkshire Hathaway’s portfolio, reflecting Buffett’s belief in its long-term potential despite historic underperformance.
• The iconic firm shows signs of improvement, with reduced debt, rising margins, and strong consumer demand, suggesting potential upside for investors.

Where Kraft Heinz Ranks In Buffett’s Top 10 Holdings

One noteworthy fact about Kraft Heinz as it pertains to Berkshire’s portfolio of equity holdings is that it ranks highly. While many money managers hold an array of stocks, many of which comprise small percentage stakes, Kraft Heinz is in fact a 3.8% share of the portfolio.

That may seem small in percentage terms but only a handful or so of stocks rank ahead of it.

Apple (NASDAQ:AAPL) remains the most noteworthy, commanding a 30.9% stake while American Express comes in second with a 12.8% share of the portfolio.

Next are favorites Bank of America (NYSE:BAC) (12.3%), Coca Cola (NYSE:KO) (9.3%) and Chevron (6.4%), followed by Occidental Petroleum, which he continues to buy up quite aggressively.

Other than those, no other stock commands such a large stake in Buffett’s portfolio as Kraft Heinz, suggesting that Buffett may have concluded that he overpaid for the company but he still believes in its long-term prospects.

And having held it for about a decade or so, the odds are he’s not likely to unload it anytime soon, particularly given the 4.5% yield it pays to new investors.

Why Buy Kraft Heinz?

If you’re considering buying Kraft Heinz, the fact that Buffett continues to hold it serves as ammunition to support the bull case, but what else is a good reason to own it?

Beyond the attractive dividend that pays out $0.40 per quarter or $1.60 annually, Kraft is showing substantial signs of improvement as it relates to both its profit and loss statement and balance sheet.

You don’t have to go back very far to see why investors were nervous of holding the position and sold it with abandon soon after Buffett consummated his deal with Brazilian private equity partner 3G Capital.

Back then, the company was saddled with debt, a boatload of it. In 2016, long-term debt ballooned to an enormous $29.71 billion but, in the intervening years, it has been slashed dramatically by around $10 billion or nearly a third to a little over $19 billion.

Where the company falls a little shy of impressive performance is its revenue line item, which really hasn’t done much of anything over that same time period. It sure has been consistent, though. In 2016, the top line was $26.3 billion for the year while in the past fiscal year it was $26.6 billion. In only a single year since then has the revenue figure not been $26 billion and change.

So, Kraft Heinz very much has the hallmarks of being the turtle in the race with the hare, aka technology stocks or even fast-food startups. But that’s okay, it pays a dividend that can largely now be trusted, having remained stable for five years, and it generates about $2.8 billion in net income on sales, a healthy figure.

Margins are starting to climb higher too, growing from 31.1% in 2022 to 33.7% last year and operating income of $4.5 billion is as high as it’s been in the past 6 years.

Put all of those ingredients into the melting pot and where do we end up?

Will Kraft Heinz Ever Recover?

KHC is likely to recover according to 21 analysts who have a consensus price target of $39.41 per share, suggesting 12% upside opportunity. Of those analysts, seven recently upgraded their earnings estimates for the upcoming quarter too, suggesting a positive swing in how Wall Street views the firm.

Add to that the stronger balance sheet and improving income statement, and the financials are starting to look more compelling, particularly as net income grows and margins improve, even if sales are not setting the world alight when viewed through the lens of growth.

Most of all, though, the reason Buffett likely has stuck with the company and the reason the stock has potential is the tastes of consumers are unlikely to change anytime soon. The demand for the brands for which Kraft Heinz is famous, whether Cracker Barrel or Capri Sun are unlikely to wane anytime soon. That in turn should translate to a steadily rising share price over time. Pair it with the strong dividend yield and potentially it’s a winning combination for prospective investors.