Investors watching Kraft Heinz (KHC -0.55%) since 2015's merger of Kraft Foods and H.J. Heinz probably know the pairing hasn't panned out as well as initially hoped. Even Warren Buffett -- who largely orchestrated the deal -- now concedes he misjudged the math that motivated the pairing.
The giant food company is neither achieving the cost savings nor the sales leverage it expected from the merger. The COVID-19 pandemic, followed by rampant inflation, only made matters worse. That's why the stock's gone nowhere for the past three years.
A funny thing's now happening, though. While last quarter's results were less than thrilling, a light's starting to shine at the end of the tunnel -- and it's not an oncoming train. Relatively new CEO Carlos Abrams-Rivera seems to have a handle on where the company is and where it needs to go next.
This fresh hope, paired with the stock's cheap price, makes Kraft Heinz an interesting prospect for value-seeking investors.
Who's Carlos Abrams-Rivera?
Warren Buffett hasn't given up on Kraft Heinz, for the record. Berkshire Hathaway still owns 325 million shares of the stock, or roughly one-fourth of the entire consumer goods company.
But why's he sticking with the stagnant stock? While he acknowledges things initially went sideways with the pairing of Heinz and Kraft, Buffett thinks the potential is still there. The key is simply unlocking it.
Enter Abrams-Rivera. He's an industry veteran as well as an insider.
Before taking the helm, Abrams-Rivera served as executive vice president and then president of Kraft Heinz's North American business for three years. Before that, he was an executive with Campbell Soup, and before his stent with Campbell, he worked for Mondelez. And before that, interestingly enough, he was an executive with Kraft prior to its merger with Heinz. Not only does he have a wealth of experience in the food business, but he also knows Kraft Heinz's competitors inside and out. That's huge.
For investors, though, it's the seemingly little things Abrams-Rivera is doing that could prove to be very big boons.
Meet the new and improved Kraft Heinz
Take the company's plans to revive its struggling mac-and-cheese business as an example. On the surface, it seems too simple of a product to tweak. Under the surface, though, there's much to consider when handling this popular, low-cost food. Pricing, packaging, and promotion must all be fine-tuned for each retail partner, who may be serving very different kinds of shoppers.
Abrams-Rivera is also rethinking Kraft Heinz's logistics framework -- particularly as a means of curbing costs. All told, the company anticipates culling $500 million in unnecessary supply chain costs every year through 2027, bringing the total annual savings up to $2.5 billion at the end of that time frame.
Abrams-Rivera's inspiring real innovation as well. As an example, the new 360CRISP platform makes microwaved food crispy in the way you'd expect it to be when cooked in an oven.
Image source: Getty Images.
None of these efforts seem to matter yet. Revenue and total food volume sold are essentially flat. Ditto for Kraft Heinz's sales outlook for the first half of the year now underway.
The back half of 2024, however, will likely start showing measurable growth as these and other initiatives finally start gaining traction. Analysts believe this rekindled growth will be maintained at least through next year, too, as inflation continues to level off.
And now, all of a sudden, Kraft Heinz stock deserves to be back on investors' radars.
A cheap way to step into a great revitalization story
Signs of new life are only half of the argument for owning a stake in Kraft Heinz, however. The other half is the stock's low price.
As of the latest look, Kraft Heinz shares trade at a modest 12.6 times last year's earnings, and only 12.4 times this year's projected per-share profits. For comparison, the S&P 500 is currently valued at a trailing price/earnings ratio of nearly 23 times its past and forward-looking earnings.
Granted, Kraft Heinz's consistently low single-digit growth rates merit that lower valuation. The stock's price/earnings ratio, though, arguably undervalues the strength of the company's brand names, its consistent results, and its reliable dividend stemming from those results.
Although the company modestly cut its quarterly dividend back in 2020 due to the disruption caused by COVID-19, it still made regular cash payments, and it was still regularly raising its annual dividend payout prior to the pandemic. If Abrams-Rivera's plans go as expected, dividend increases in the foreseeable future aren't out of the question. Newcomers will be stepping in while the yield's already a healthy 4.6% in the meantime.
But do you want to wait until Kraft Heinz is seeing better days? The thinking certainly makes sense. Just bear in mind that stocks have a knack for starting to reflect strong results before those results actually begin taking shape. Waiting to take the plunge could mean you end up missing out on gains.
