This Berkshire Hathaway holding’s been losing ground for some time mostly because the market’s not seeing the bigger picture.
It’s rare to talk about a Warren Buffett stock being catapulted higher. Most of the Oracle of Omaha’s picks for Berkshire Hathaway (BRK.A 0.12%) (BRK.B -0.01%) are relatively tame — even boring — and not subject to wild swings in either direction.
Every now and then, though, even one of Buffett’s picks stumbles into an extreme situation that sets the stage for an equally extreme reversal. Take shares of The Kraft Heinz Company (KHC -0.32%) as an example. This long-term Berkshire holding has been a disappointing performer for years now. But this stock could be on the cusp of a major, long-lived recovery.
Kraft Heinz’s overdue overhaul
Investors that have kept tabs on consumer staples giant Kraft Heinz for the past few years might not see it. And to be fair, such doubt is understandable. The pairing of Kraft and Heinz back in 2015 simply hasn’t produced the synergies it was expected to. Even Buffett himself conceded in 2019 that Berkshire “overpaid for Kraft” when he spurred Heinz to make the deal, acknowledging the lack of payoff that up-ended the stock over the course of the then-prior two years.
Shares recovered somewhat during and because of the early days of the COVID-19 pandemic, but haven’t budged since then. Neither has its dividend. Unsurprisingly, revenue hasn’t improved much during this time frame.
There’s a reason, however, Warren Buffett has stuck with Berkshire Hathaway’s $10 billion, 326-million-share stake in the company despite the stock’s and the company’s lingering poor performance. That is, there’s reason for hope right around the corner. While there’s no denying little has gone right for the company for a while now, the stage is set for a drastic improvement in Kraft Heinz’s business.
Credit the 2023 choice of Carlos Abrams-Rivera as CEO for at least some of this impending change. In February 2024 he laid out a surprisingly detailed plan to reignite the company’s growth, first by breaking down Kraft Heinz’s three core kinds of products, each of which should be handled with its own unique strategy. For instance, basics like macaroni and cheese (where the company leads the market) should be leveraged for revenue growth, while its smaller business like desserts (where Kraft Heinz isn’t dominant) should prioritize its higher profit margins.
Innovation is also intentionally ramping up. Pickle-flavored ketchup and “everything” bagel-flavored mac and cheese are just a couple of the twists the company’s unveiled during the past few months.
Abrams-Rivera’s turnaround efforts aren’t stopping there, however. Part of his reinvigoration plan also includes the culling of $2.5 billion in unnecessary annual spending by 2027. So far it’s cut a little over $1 billion of these targeted expenses. For perspective, The Kraft Heinz Company does about $26 billion worth of business per year.
The stage is set even if nobody’s watching
There’s just one glaring problem here…none of this work seems to be helping. Last quarter’s organic sales fell 2.2% year over year, for instance, while total food volume sales fell even more. In both cases, last quarter’s weakness also extends longer-term trends. Profits aren’t exactly improving, either.
KHC Revenue (Quarterly) data by YCharts
Don’t be too quick to jump to conclusions based on these results, though.
At least part of the current-but-likely temporary headwind can be chalked up to the economic environment. Consumers are cutting back when and where they can. As Deloitte pointed out in its most recent review of consumer spending within the all-important U.S. market, despite five straight months of improvement, as of October 2024 spending is weaker than it was at the same point of pandemic-crimped 2021. Less affluent consumers that are more likely bargain-shop and cook at home are particularly strained, too.
But there’s hope on the horizon. Goldman Sachs believes the U.S. economy is poised to beat expectations in the coming year by expanding to the tune of 2.5%, And in September, The Conference Board highlighted that worker compensation budgets for 2025 were rolling in 3.9% above 2024’s levels, versus 2024’s more modest 3.8% increase. Interest rate cuts are looming, too, even if not as aggressively as expected just a couple of months ago.
Connect the dots. Consumers should be at least in slightly better financial shape in the foreseeable future.
Then there’s the other critical detail to keep in mind about Kraft Heinz here. That is, many of Abrams-Rivera’s initiatives haven’t yet had ample time or opportunity to produce meaningful results.
While Morningstar‘s Erin Lash recently conceded the company “hasn’t been immune to the weakening consumer narrative,” she also argues that “the pursuit of efficiencies that prove lasting, brand spending elevation (marketing and product innovation), enhancement of its capabilities (category management and e-commerce), and scale leverage to more nimbly respond to changing market conditions” should allow Kraft Heinz to drive modest sales gains that will in turn restore its pre-pandemic profit margins. It’s just going to take a little more time — perhaps into next year — to achieve and prove this traction. Morningstar rates the stock at five stars in the meantime…its most bullish rating.
At this price, more reward than risk
There’s certainly no guarantee the planets will proverbially align for Kraft Heinz in 2025, or that most investors will see it if and when that happens; some investors can’t look past the stagnant dividend anyway.
From an honest risk-versus-reward lens, though, there’s more upside on tap than downside here, especially in light of the fact that Kraft Heinz shares recently reached a multiyear low for all the wrong reasons (like last quarter’s lackluster results). This is a company that’s still in transition. Yet this overhaul is nearly done at a point the economic backdrop could take a serious and seemingly unlikely turn for the better. Expect it when you least expect it. Once enough investors realize the tide’s taken a turn for the better, it could spark a major self-fueling rally that gathers steam on the way up.
Or this might help convince you to take a shot: For all of the arguments not to own Kraft Heinz at this time, it’s telling that Buffett’s Berkshire Hathaway is still sitting on this underperforming stock. Maybe it’s the reliable dividend, even if it’s not growing. Even more telling is the fact that he’s chosen to stick with it when he’s been willing to shed stakes in bellwether companies like Apple and Bank of America. You might want to take this subtle hint on its own merits.
Bank of America is an advertising partner of Motley Fool Money. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Bank of America, Berkshire Hathaway, and Goldman Sachs Group. The Motley Fool recommends Kraft Heinz. The Motley Fool has a disclosure policy.
