Photograph by Chris Hondros/Getty Images
is shaping up as a reputational and financial black eye for
CEO Warren Buffett.
Kraft Heinz shares (ticker: KHC) continued their slide this past week, falling $3.75, or 12%, to $27.36, after hitting their lowest level since the merger of Kraft Foods and H.J. Heinz in 2015. The stock is 70% below its high of $97 in 2017, a huge decline for a leading company in the usually stable food industry, with products like Heinz Ketchup and Philadelphia Cream Cheese.
Berkshire (BRK.B) is now sitting with a loss on Kraft Heinz as its once-substantial gains have melted away. Berkshire’s 27% interest—some 325.7 million shares—is now worth about $8.8 billion, compared with a cost of $9.8 billion. Berkshire had a paper profit of more than $20 billion at Kraft’s peak.
Kraft Heinz shares could be near a bottom after the latest downdraft. They trade for less than 10 times projected 2019 earnings of $2.79 a share and yield 5.9%. The stock, which once commanded a premium, now has the lowest price/earnings ratio among its peers. And its dividend—one of the highest in the sector—looks safe after it was cut to 40 cents a quarter from 62.5 cents in February. Its dividend payout ratio is below 60%, based on the 2019 consensus.
Piper Jaffray analyst Michael Lavery isn’t pounding the table on the stock, but he did upgrade it to Neutral from Underperform Thursday, headlining his note: “Many risks remain, but now appear to be priced in.” They include additional spending on what the company’s critics have called marketing-starved brands and potential divestitures. But even if those factors reduce Lavery’s 2020 earnings estimate to $2.50 a share from his published projection of $2.90, the P/E multiple would be a reasonable 11, he wrote.
The big hit to Kraft stock came in February, when it fell 30% in a single day to around $35 after the company took a $15 billion write-down related to the value of its brands, issued disappointing 2019 financial guidance, and slashed the dividend.
Buffett told CNBC at the time that he didn’t think the stock was cheap, saying he had “absolutely no intention of buying.” He added, “There are other things I think where you get more for your money and better prospects.” He has been right so far.
Kraft is the biggest disappointment in Berkshire’s $200 billion equity portfolio, which is largely managed by Buffett and has trailed the
S&P 500 index
in the current decade.
Berkshire stalwarts like
(KO) have been laggards, while a $14 billion investment in
(IBM) earlier in the decade was sold at close to break-even in 2017—a notable miss for Buffett, considering the S&P 500 was up about 50% during that span. Other sizable Berkshire holdings
Bank of America
(BAC) have been winners.
Buffett has been deeply involved with Kraft Heinz, starting with the $23 billion buyout of Heinz orchestrated by Berkshire and the Brazilian investment firm 3G Capital in 2013 and followed by the merger of Kraft and Heinz in 2015. Buffett served on the Kraft Heinz board from 2015 to 2018.
He regularly defended the 3G managers who have run Kraft Heinz from critics who argued that the company’s program of deep cost-cutting hurt the underlying business. At Berkshire’s annual meeting in 2017, Buffett said of 3G that it was “very good at making a business productive with fewer people.” It is estimated that 3G cut the staffs of Heinz and Kraft by over 25%.
The latest downdraft in Kraft stock came after reports of weak trends in recent food sales based on scanner data and a negative report from
Robert Moskow, who cut his price target to $26 from $33 while maintaining an Underperform rating.
Moskow reduced his 2019 earnings estimate to a below-consensus $2.68 a share from $2.80, writing that a continuing investigation by the Securities and Exchange Commission into the company’s internal controls could reveal more breakdowns and “negatively affect the company’s forward outlook.”
The bad news for Kraft may not stop there, but that possibility seems increasingly discounted in the food giant’s depressed stock price.
Write to Andrew Bary at email@example.com