He may be the world's best stock picker. But that doesn't mean every single one of Warren Buffett's picks held by Berkshire Hathaway dishes out gains each and every year. And that's OK -- the Oracle of Omaha is in it for the long haul. He likely understands you're going to take some short-term lumps while waiting for a company's long-term performance to be reflected in its stock's price.
That said, every now and then the proverbial planets align for one of Berkshire's holdings, setting the stage for a parabolic move. The fund's position in The Kraft Heinz Company (KHC -0.55%) could be on the cusp of such a move now. Here's why.
A tough five years for shareholders
It's been an uncharacteristically poor performer since Buffett helped orchestrate the merger of food giants Kraft and Heinz back in 2015. Shares have been more than halved since the post-merger stock began trading, in fact, with most of that setback taking shape before the COVID-19 pandemic.
What gives? As it turns out, the anticipated cost savings and competitive edges weren't so easy to achieve. Supply chain disruptions stemming from the pandemic followed by soaring inflation have held the stock down in the meantime. It's been so long since the company's made a truly healthy fiscal showing, in fact, that many investors and analysts may be throwing in the towel now, presuming Kraft Heinz is beyond repair.
But that could be a big mistake. This year could mark the beginning of a long overdue turnaround.
Meet the new and improved Kraft Heinz
To be clear, there's still much work to be done. The analyst community is essentially calling for no sales growth this year, with per-share earnings only projected to grow from last year's $2.98 to $3.04 per share. That's anything but thrilling.
There are some initiatives that relatively new CEO Carlos Abrams-Rivera is leading, however, that will take time to measurably matter. One of these is a rethinking of the company's innovation priorities. It's ramping up its reach into the easy-ready meals and what it refers to as "substantial snacking" categories, for instance, as well as doubling down on taste elevation.
One such development is the creation of a boxed kit allowing consumers to recreate Taco Bell's Crunchwrap Supreme and Chipotle Chicken Quesadilla at home. The company is also repositioning its popular brands of macaroni and cheese into being meals themselves. These are higher-growth opportunities that Kraft Heinz says could one day account for three-fourths of its revenue, versus less than two-thirds of its sales right now.
The Kraft Heinz Company also understands it must still look beyond food itself to be better. It's got to spend more efficiently as well. That's why it's now using artificial intelligence (AI) to plan its promotional calendar. It's also getting a better handle on demand forecasting. These efforts are paying off. The company says it's still on track to realize this year's target of $2.5 billion worth of new spending efficiencies.
This time is different -- really
To be fair, at first blush much of what Abrams-Rivera appears to be doing now doesn't look all that different than what his predecessor, Miguel Patricio, appeared to be doing then. All food companies strive to innovate in order to remain competitive. All companies look for ways to cut costs.
Dig deeper though. Kraft Heinz is emerging from a years-long period of disappointing management followed by an inflation-spurring pandemic. It's stronger now than it was then, and is certainly more in tune with what consumers as well as its institutional customers actually want.
This includes (among other things) more plant-based eating options like plant-based Oscar Mayer hot dogs in addition to making comfort foods like mac and cheese even more accessible. This is actually the most holistic strategic thinking the company's demonstrated in quite some time.
Image source: The Kraft Heinz Company's CAGNY 2024 presentation.
That's also why analysts expect Kraft Heinz's top- and bottom-line growth to start showing some measurable acceleration beginning next year.
Consider taking Buffett's lead
Do Buffett and Berkshire's other managers fully understand the turnaround The Kraft Heinz Company is finally piecing together for itself? Maybe. Maybe not. But he certainly sees enough to stick with all 326 million shares of the company Berkshire's been holding since 2015, when Kraft and Heinz merged. That speaks volumes.
Maybe the dividend has something to do with it. The stock is yielding 4.6% right now, based on a dividend that's been paid every quarter -- even if it hasn't grown -- since the beginning of 2020. Earnings have more than adequately funded the dividend, too. In fact, although the company's management has made no mention of it, analysts' projected earnings growth along with Kraft Heinz's recent cash-flow growth could be setting the stage for a dividend bump in the foreseeable future.
KHC Cash from Operations (Quarterly) data by YCharts
Even if that's not in the near-term cards, forward progress is. The hard part is the waiting. But there's still reason to take a shot sooner rather than later. Kraft and Heinz are both iconic brand names the market wants to support. Once enough investors and analysts start seeing a glimmer of hope on the horizon, don't be surprised to see some real movement in the stock.
