Kraft Heinz has been one of the “widow and orphan” stocks that routinely pay dividends year after year and are rock solid stable. That is no longer the case! Warren Buffett’s Berkshire Hathaway holds just over a fourth of KHC stock and Berkshire Hathaway lost more than $4 billion in one day as Kraft Heinz fell by 27.5%. What happened and, with his famous business acumen, can Buffett fix Kraft Heinz?
What Happened at Kraft Heinz?
Investor’s Business Daily dissects the Kraft Heinz meltdown.
Kraft Heinz (KHC) plummeted Friday after writing down the value of some of its best-known brands by $15.4 billion, an acknowledgment that changing consumer tastes have destroyed the value of some of the company’s most iconic products.
The packaged-food giant’s charge to reduce the goodwill value of the Kraft and Oscar Mayer trademarks and other assets came with disappointing fourth-quarter earnings and an accounting subpoena from securities regulators. The charges resulted in a net loss of $12.6 billion, or $10.34 a share.
Kraft Heinz stock fell 27.5% to 34.95, hitting a record low.
Changing tastes in the packaged food world, a desire for more organic or apparently organic products have severely eaten into and destroyed value in the Kraft Heinz product line. The admission of such problems and the acceptance by investors destroyed a fourth of the company’s value in a heartbeat.
An Understandable Investment That Was Not Well Understood
Kraft Heinz came into being in a move set up by Berkshire Hathaway and the 3G Capital private investment firm. They merged Kraft Foods and Heinz to create the third largest food and beverage company in the USA. The parent companies go back to the 19th century.
Buffett has been quoted numerous times to the effect that he does not invest in a company unless he understands what they do, how that makes money, and how that will continue to make money over the long term. A business whose products are known and consumed by millions every day and whose products are the center of the supermarket business would seem to be a natural as a Buffett investment. Furthermore, he is a master at merging and cutting costs. Unfortunately, investors in this company did not see the demographic trends that send shoppers to look for organic foods, “healthy food choices,” and other competitors of Kraft Heinz and its stable of old products.
The company misled investors, intentionally or unintentionally, with rosy forecasts which turned out to be widely off the mark. The bottom line is that the Kraft Heinz line of products is not as popular as it once was and the company did not see that coming or intentionally closed their eyes to the truth!
Can Buffett Fix Kraft Heinz?
Warren Buffett is perhaps the most famous and most successful investor in the world. He routinely vies with Bill Gates and Jeff Bezos for the claim to be the wealthiest man in the world and that includes his donating about $7 billion to charity every year! His investment results over the years border on the miraculous. So, can Buffett fix Kraft Heinz? Because, if he can, this is a fantastic stock to buy on the dip and either cash in for short term profits or hold forever.
Unfortunately, a big part of Buffett’s strength is putting together big deals and the cutting costs and improving operational efficiency. He has already done this with Kraft Heinz. His other major strength is seeing into the mind of the consumer and understanding what will sell and make money for years to come. In the case of Kraft Heinz, he has used the efficiency card and simply missed the call on how well Kraft Heinz products will sell. This is probably not a stock to buy on the dip because it has simply corrected to its real intrinsic value.
