What Was Wrong at Kraft Heinz?

What Was Wrong at
Kraft Heinz?
By www.ProfitableInvestingTips.com

http://profitableinvestingtips.com/stock-investing/what-was-wrong-at-kraft-heinz
Last week the stock of the packaged
food giant, Kraft Heinz, took a
nosedive.

The stock fell by 28% on news of a SEC
investigation of the company’s
accounting practices but more so the
nosedive was due to gigantic losses in
the last year.

The package food business is very
competitive and companies need to
balance quality, price, advertising, and
new product lines in order to stay
competitive as much so as to gain an
advantage.

What was wrong at Kraft Heinz was
that they seem to have lost their way.

Cost cutting became the order of the
day in order to maintain healthy profit
margins.

But, consumer tastes are always
evolving and old, tried and true
products can easily lose ground,
especially in an era when everyone
wants “organic.”

Kraft Heinz

Kraft Heinz was formed just a few years
ago in a merger of two companies with
hundred-year histories, Kraft Foods and
Heinz, the famous ketchup maker.

The deal was pushed by none other
than Warren Buffett and is a classic
Buffett investment.

The so-called “Oracle of Omaha” only
invests in companies when he fully
understands how they make money
and how they will continue to do so for
years on end.

The company formed by two packaged
food stalwarts was a typical Buffett
investment and is company, Berkshire
Hathaway, owns slightly more than a
quarter of Kraft Heinz stock shares.

Management sought to make the
company more profitable by cutting
$1.7 Billion in “excess costs.”

And, prior to the recent debacle, Kraft
Heinz as returning more per
shareholder dollar than competitors
like General Mills. That is no longer the
case!

The company traded for $80 a share
after the merger and from early 2016
to the middle of 2017 rose to the $90
range.

Since that time the cost cutting at Kraft
Heinz was not working so well as the
share price gradually fell to the upper
$40 range. Then the bombshell
exploded.

Kraft Heinz Stock Price

CNN reported that Kraft Heinz posted a
huge loss and revealed an SEC
investigation.

Kraft Heinz wrote down the value of its
Kraft and Oscar Mayer brands by $15
billion, posted a $12.6 billion loss, cut
its dividend by 36% and announced its
accounting practices are under
investigation by the Securities and
Exchange Commission.

Some pundits have referred to an
“existential crisis” for Kraft Heinz.

On the other hand, Warren Buffett who
holds a fourth of the stock and suffered
a loss of more then $4 Billion, says he
expects to be holding the stock five
years from now.

His comment was that management
seems to have gotten confused about
cost cutting and consumer tastes.

Millennials, Organic Foods,
and Amazon.com

A strong “selling point” for Kraft Heinz,
General Mills, Unilever, Mondelez
International, Nestle, and the like is
that they have products with strong
brand name recognition.

Kraft macaroni and cheese, Heinz
ketchup, and Oscar Meyer processed
meats have been around for a long,
long time.

But, does the generation of millennials
want these products or something with
the label “organic?”

Now that Amazon.com is running
Whole Foods, there is a huge
marketing machine pushing organic
foods and the convenience that
Amazon.com has created with home
delivery.

The take home point from what went
wrong at Kraft Heinz was probably that
they quit thinking about what the
consumer wants and thought their
product line was golden and would sell
forever.

So, they focused on cutting costs. It is
amazing really how such a large
company with so many bright people
could have missed this at their stock
faltered over the last couple of years.

Kraft Heinz Products

Beware of a Visit by the SEC

CNBC reported the SEC subpoena.

Kraft also disclosed the SEC subpoena is
part of an investigation into its
procurement and accounting policies.

The company said it launched an
internal investigation into the matter
after receiving the subpoena.

Following its investigation, Kraft Heinz
said it posted a $25 million increase to
the cost of products sold after
determining it was “immaterial to the
fourth quarter of 2018 and its
previously reported 2018 and 2017
interim and year to date periods.”

This may be a minor issue, blown out
of proportion due to the huge stock
loss and inventory write down.

Or it might not be. Kraft Heinz has
enough problems right now and does
not need to have the SEC on their
doorstep. But, that is how it is.

Is Kraft Heinz a Stock to Buy
Right Now?

We write frequently about intrinsic
stock value and long term investing.

When a stock takes a hit but the
company still has the ability to
generate good profits over the long
term, it is a good buy for a long term
investor who is willing to wait and
whose preferred length of holding a
stock is forever.

The issue with Kraft Heinz is if they can
revitalize their old product line, add
new items, spiff up the old ones and do
so in such a manner as to bring back
sales, profits, and their stock price.

It is of interest that Warren Buffett says
that he believes he will holding that
stock in five years.

That is a good vote of confidence. On
the other hand, he might be expected
to say that in order to stock the decline
of the Kraft Heinz stock price.

In the case of Berkshire Hathaway’s
investment in Kraft Heinz it will be
instructive to see if they buy more of
the stock, sell the stock, or simply hold
their ground in the coming months.

The concern for long term value
investors is that Buffett got it wrong
this time around and that Kraft Heinz is
now selling at its appropriate price
considering the changes in the packed
food industry and its aging product
line.

If that is the case, this is not a stock to
buy and wait for bounce or recovery
and not a stock to hold for the long
term!

What Was Wrong at Kraft Heinz?

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What Was Wrong at Kraft Heinz?