Warren Buffett is one of the greatest investors of all time, but even the great ones make mistakes. Buffett owns 326 million shares of The Kraft Heinz Company (KHC 1.23%) due to his involvement in the merger that married Kraft and Heinz in 2015.
The company owns various well-known food brands like Heinz Ketchup, Oscar Mayer, Jell-O, Kraft, etc. Unfortunately, the stock hasn't fared as well and is down more than 50% over the past five years.
Can investors expect the stock to rebound? First, you need to understand what's ailing Kraft Heinz, and here are two charts that tell you all you need to know.
Image source: Getty Images.
Problem one: Shrinking sales
Revenue is the lifeblood of any business. A food company like Kraft Heinz doesn't need a lot of growth to thrive, but it needs at least some growth over the long term. You can see in the chart below how sales have struggled over the past five years.
Sales are stagnant, outside of a spike from 2020 to 2021 from a combination of pantry-stuffing during COVID-19 and price hikes. The company did $26.5 billion in revenue in 2016 and $26.0 billion in 2021, $500 million less after five years.
KHC Revenue (Annual YoY Growth) data by YCharts.
Many food and beverage companies slowly increase prices to help create growth, so failure to grow at all is a sign that their brands are simply becoming less popular with consumers. The company wrote down the value of its core Kraft and Oscar Meyer brands by $15 billion in 2019, acknowledging its brands' struggles.
Problem two: Tons of debt
Debt can be like an anchor around your feet, dragging you under no matter how hard you try to swim to the surface. It's proven to be a huge problem for Kraft Heinz, considering its lack of growth. The company had a lot of debt following the merger of Kraft and Heinz, and it remains heavily in debt years later.
KHC Net Total Long Term Debt (Quarterly) data by YCharts.
The company has more than $18 billion in net debt (total debt minus cash on hand), which has improved in recent years after it sold assets to raise money, including nuts brand Planters to Hormel for $3.35 billion last year.
However, you can see in the above chart how the company's leverage remains high. The debt-to-earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio shows how much debt a business has compared to its cash profits. I consider a healthy ratio to be under three, so you can see how Kraft Heinz remains much worse than that level.
Investor takeaway
Having a lot of debt and struggling to sell products is a bad combination and sums up why the stock has performed so poorly over the past five years. The company could still figure things out in the future, but until Kraft Heinz can grow and improve its balance sheet, it could be tough to get excited about the stock.
