Nobody seems to like this stock or the company right now. Just take a step back and look past all the bearish rhetoric at what’s really going on.
Do you like low-cost stocks? If so, you’re not alone. So does legendary stock-picker and Berkshire Hathaway (BRK.A 0.20%) (BRK.B 0.24%) CEO Warren Buffett. His company is currently holding about four dozen value stocks, which collectively account for one-third of the conglomerate’s total market cap.
One of these names is absurdly cheap right now, and could make you measurably richer at some point in the foreseeable future. That stock? The Kraft Heinz Company (KHC -0.15%).
Surprised? Just hear me out.
Yes, that Kraft Heinz
Anyone keeping tabs on Kraft Heinz for the past few years might be more than a little shocked at the suggestion. While hopes were high for the merger of then-separate Kraft and Heinz that Warren Buffett helped orchestrate back in 2015, by 2017 it was clear the pairing was a bust. Buffett eventually conceded in 2019 that “we [Berkshire Hathaway] overpaid for Kraft,” although the assessment still understated the ultimate problem. Delivering that ugly truth is the fact that KHC stock — including Berkshire’s 325.6 million shares — continued to fall well after that confession, recently hitting a multiyear low that’s more than 70% below 2017’s peak.
What went wrong? A handful of things. Chief among them is that these two companies should have never been combined in the first place.
Corporate culture is a real thing. That’s arguably even more the case for older, bigger, and more complex companies like Heinz as well as Kraft, each of which also managed in-house departments like advertising and product development. Although Heinz’s then-CEO Bernardo Hees thought he had the right plan in place to successfully meld the two companies into one when he took the helm in 2015, in retrospect he clearly didn’t.
Hees was replaced by Miguel Patricio in 2019, who was replaced by Carlos Abrams-Rivera in 2023, neither of whom was able to rekindle the magic of either iconic brand. (That being said, in their defense it’s worth pointing out that both companies were struggling with relevancy and marketability prior to the merger. It may have been a lost cause no matter who was in charge.)
Fast-forward to today… or, at least earlier this month. After 10 torturous years, Kraft Heinz announced in early September that it would be splitting back into two separate publicly traded entities in an effort to unwind the disastrous merger.
It’s not quite a reversion back to pre-merger Kraft and Heinz. One of the companies will own Heinz, Philadelphia cream cheese, and Kraft macaroni and cheese. The other will own Oscar Mayer, Kraft singles cheese slices, and Lunchables. But this divvying up allows for at least a bit more focus than is currently possible. That can only help.
Shrinking its way to success
Not everyone agrees this is what the struggling combined company needs at this time. In fact, given the stock’s stumble following the announcement, most interested parties aren’t enthusiastic about the split. Buffett is reportedly disappointed as well, implying he thinks what’s not working can still be fixed without breaking the company up. Or if nothing else, as independent food industry analyst Nicholas Fereday noted, “The very fact they’re splitting up doesn’t change any of it and explain how they’re going to inject energy, excitement and clarity.”
And maybe these criticisms are fair.
Consider this, however: After more than five (and really, seven) years of poor performance, what could have been fixed arguably should have been and would have been fixed by now. If nothing else, separating the complex food behemoth into two better-focused players certainly can’t make matters any worse — once the disruption stemming from the split is in the rearview mirror anyway.
Image source: Motley Fool.
That’s the crux of the argument for stepping into a position of this beaten-down stock while its forward-looking dividend yield stands at 6.2% and the stock is priced at only about 10 times this year’s and next year’s projected per-share earnings. Most of any risk is already reflected here, leaving only upside even if that upside is modest for now.
Bolstering this bullish thesis is what’s likely to happen once Kraft Heinz becomes two companies and two stocks. Although it’s only speculation at this point, Mizuho Securities’ managing director John Baumgartner writes: “Asset sales (notably Oscar Mayer) could prune material underperformers and enhance portfolio growth prospects. We believe strategic acquirers exist, and that asset sales can prove accretive for shareholders.”
That being said, it’s worth adding that the sweeping bearishness surrounding this ticker now also makes it something of a contrarian prospect. That won’t keep it moving higher forever, but it could get it moving in that direction.
Not your typical buy-and-hold investment
It’s admittedly unusual to tout the breakup of a food giant as a means of unlocking value. Technology and industrial companies? Yes. But consumer staples? Not so much. It’s an industry that’s historically benefited from scale rather than been crimped by it.
The marketplace is changing, though. So are consumers. People are generally eating more pre-prepared and processed food these days, or eating more restaurant-prepared meals; the made-at-home meal space that Kraft Heinz operates in is a shrinking no-man’s land. And to the extent the company’s products are still relevant, technology and consumers’ interest in exploring brands other than the ones they grew up with are making it possible for smaller players to compete with giants like Kraft Heinz.
So, perhaps a breakup followed by the sale of some of both new companies’ brands to smaller, nimbler food companies is what’s needed to unlock the value that’s buried deep within Kraft Heinz.
Just don’t lose perspective on the kind of trade you’d be taking on. The Kraft Heinz Company is anything but a foundational holding for anyone’s portfolio. There’s no certainty here, but there’s sure to be plenty of volatility as long as splits, sales, and spinoffs are being considered.