Currently, this stock and its parent company aren’t winning any popularity contests. But let’s take a moment to look beyond the negative chatter and see what’s really happening.
Do you favor low-cost stocks? You’re in good company. Legendary investor and Berkshire Hathaway CEO Warren Buffett shares that preference. His firm is currently invested in around 48 value stocks, which make up about one-third of its total market value.
Among these, one stock stands out for its exceptional affordability and potential to increase your wealth: The Kraft Heinz Company (KHC).
A Surprising Choice
If you’ve been following Kraft Heinz in recent years, you might be taken aback by this suggestion. The merger of Kraft and Heinz, which Buffett supported in 2015, initially raised hopes, but by 2017, it was clear the partnership was faltering. Buffett admitted in 2019 that “we [Berkshire Hathaway] overpaid for Kraft,” a statement that didn’t fully capture the gravity of the situation. Since then, KHC stock—along with Berkshire’s 325.6 million shares—has plummeted, recently reaching a multi-year low more than 70% below its peak in 2017.
What Went Wrong?
Several factors contributed to this decline. Primarily, these two companies likely shouldn’t have merged in the first place.
Corporate culture matters, especially for larger, older companies like Kraft and Heinz, each with its own departments for advertising and product development. Although then-CEO Bernardo Hees believed he had a solid plan for the merger, it’s clear in hindsight that it didn’t work out. Hees was succeeded by Miguel Patricio in 2019, followed by Carlos Abrams-Rivera in 2023, neither of whom could revive the magic of these iconic brands. It’s also worth noting that both companies faced challenges with relevance and marketability before the merger, suggesting it may have been a lost cause regardless of leadership.
A New Direction
Fast forward to today, or at least earlier this month. After a decade of struggle, Kraft Heinz announced in early September its plans to split back into two separate publicly traded entities, aiming to reverse the ill-fated merger.
This split won’t fully return to the pre-merger Kraft and Heinz. One entity will manage Heinz, Philadelphia cream cheese, and Kraft macaroni and cheese, while the other will take on Oscar Mayer, Kraft singles, and Lunchables. This division should allow for greater focus, which can only be beneficial.
Diverging Opinions
Not everyone believes this split is the right move for the beleaguered company. The stock stumbled after the announcement, and many stakeholders remain skeptical. Buffett himself expressed disappointment, suggesting that the existing issues could be resolved without breaking up the company. As food industry analyst Nicholas Fereday pointed out, “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.”
These critiques may hold merit. After several years of poor performance, it’s likely that any necessary fixes should have been implemented by now. However, separating this complex food giant into two more focused entities may at least prevent further decline—provided the disruption of the split passes.
The Case for Investment
This brings us to the argument for investing in this undervalued stock, especially with a forward-looking dividend yield of 6.2% and a price of about 10 times projected earnings for this year and next. Most risks appear to be priced in, leaving room for potential upside, even if modest.
Supporting this optimistic outlook is the speculation about what will happen after the split. Mizuho Securities’ John Baumgartner notes, “Asset sales (notably Oscar Mayer) could prune material underperformers and enhance portfolio growth prospects.” There’s a possibility that strategic acquirers may emerge, making asset sales beneficial for shareholders.
The prevailing bearish sentiment surrounding this stock also positions it as a contrarian opportunity. While it may not rally indefinitely, it could trend upward.
A Unique Investment Landscape
It’s unusual to advocate for the breakup of a food conglomerate as a path to value creation. Typically, consumer staples benefit from scale rather than suffer from it. However, the market and consumer habits are evolving. More people are opting for pre-prepared meals or dining out, while the market for home-cooked meals, where Kraft Heinz competes, is shrinking. Smaller brands are gaining ground, which makes it plausible that a breakup followed by sales to more agile companies could unlock hidden value within Kraft Heinz.
Just remember, this isn’t a typical buy-and-hold investment. The Kraft Heinz Company is not a foundational asset for any portfolio. While uncertainty looms, expect significant volatility as the company navigates splits, sales, and potential spinoffs.
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