With nothing more than a glance at the stock's recent performance, it's easy to presume the worst for Kraft Heinz (KHC 0.53%). Its shares are 30% below their mid-2022 peak and down nearly 70% from their 2017 high -- and knocking on the door of new 52-week lows. That's far worse than most other stocks have fared over these time frames.
Still, there's a reason Warren Buffett's Berkshire Hathaway is still holding the 325.6 million shares of this food giant it's been sitting on since 2015 -- and it's not just because Buffett helped orchestrate the merger of Kraft and Heinz back then. It's because the company still has tons of potential if it can just shake off the lingering fallout from the COVID-19 pandemic.
You can plug into this opportunity for yourself for a lot less than Buffett paid.
NASDAQ: KHC
Key Data Points
Doing what it's supposed to be doing
You know the company. Kraft Heinz is, of course, parent to brands like cheese powerhouse Kraft and ketchup titan Heinz. Ore-Ida, Oscar Mayer, Jell-O, and Maxwell House are just some of the other names in the Kraft Heinz family.
Food is not an easy business to be in, however, particularly of late. Competition is fierce, profit margins are typically thin, and the business itself is hypersensitive to inflation. Just when it looked like Kraft Heinz might work through the disruption spurred by the coronavirus contagion, rampant inflation rocked its world. Ditto for faithful shareholders.
A funny thing is happening as the COVID-19 pandemic gets smaller in the rearview mirror, however. Kraft Heinz is becoming more profitable following a complicated and costly 2020 and 2021, followed by 2022's revenue headwind. This year's second-quarter top line improved to the tune of 2.6%, with organic revenue growing 4% year over year. Per-share profits jumped from $0.70 in the second quarter of last year to $0.79 this year, extending a trend that's been in place for a year now.
KHC Revenue (Quarterly) data by YCharts.
Analysts expect similar growth for the remainder of this year and through next year as well. So why is the stock still struggling? This is where things get interesting.
Pessimistic perceptions can be a serious drag
In theory, stocks reflect their underlying company's current health and growth prospects. In reality, however, some equity prices are reflections of investors' opinions -- and even misguided perceptions -- about that stock's plausible future. The latter is arguably the root cause of KHC stock's prolonged weakness.
See, in retrospect, the merger of Kraft and Heinz overvalued both companies, or more specifically, it overestimated the cost-cutting that could be done once the two companies were combined. Investors gave Kraft Heinz a few years to make good on the deal's promise of value creation. But, by 2019, it was becoming quite clear that things just weren't going as hoped.
And this rare misstep from Buffett would have lingering consequences. As Stifel analyst Christopher Growe predictively (and accurately) opined at the time, "Gone are the days of investors giving this management team instant credit for any future cost savings from an acquisition -- we believe investors will maintain a skeptical eye."
Most of that management team Growe was referencing is now gone, by the way, including the company's chief executive at the time. The skepticism regarding the manageability of Kraft Heinz remains in place, though, and understandably so. Again, investors had never seen Buffett make such a mistake.
Sooner than later
The thing is, nothing lasts forever. Companies can and do change, particularly when there's new leadership. The impact from calamities like a global contagion and the subsequent swell of inflation eventually abate.
That's not happening here -- at least not yet. Little that Kraft Heinz has done since late last year (or, for that matter, the past couple of years) has been seen by investors in a positive or bullish light. Blame the lingering distrust Growe was talking about a little over four years ago.
That time is coming, though, and likely coming sooner than later.
Rooted in a transformation plan unveiled last year, Kraft Heinz is fixing what ails it the most. This includes a new innovation paradigm that involves help from third-party partners, a more thoughtful approach to penetrating overseas markets, and a rethinking of how it serves the restaurant market. The company is already seeing some benefit from these initiatives, in fact, although most of their prospective fruit has yet to bloom.
You can step into a ridiculously cheap position in this stock before most investors start believing what they're seeing and, better still, what they're about to see. Shares are priced at a mere 12.3 times their trailing earnings and an even lower 10.7 times their projected per-share profits. You're also plugging into a stock while its dividend yield is a hefty 5.1%. That's not a bad little bonus for wading into a position that may or may not have already made a major bottom.
Or, maybe this will help convince you: Although most investors have their doubts about Kraft Heinz's foreseeable future, most analysts don't. They're sporting a consensus price target of $39.78 right now, which is 25% higher than the stock's current price.
