Investment Analysis: Kraft Heinz (KHC) Under Scrutiny
Kraft Heinz (KHC) is currently in the investor spotlight following a significant $3.76 billion write-down on the stock by its major backer, Berkshire Hathaway. This move, coupled with ongoing business challenges, raises critical questions for anyone considering an investment in the food and beverage giant.
The Berkshire Write-Down and Its Implications
In its second-quarter earnings report, Warren Buffett’s Berkshire Hathaway announced a substantial impairment charge on its 27.4% stake in Kraft Heinz. This is the second major write-down Berkshire has taken on the investment, following a $3 billion charge in 2019.
The company stated the write-down was necessary because the gap between the value at which it carried the investment on its books and the stock’s actual market value was now deemed “other-than-temporary.” This is a formal acknowledgment from its most prominent investor that the 2015 merger of Kraft and Heinz has failed to deliver on its promise. Buffett himself has previously admitted that Berkshire overpaid in the deal.
Fundamental Business Challenges
The write-down reflects deeper issues plaguing Kraft Heinz. The company is struggling to adapt to a fundamental shift in consumer preferences toward healthier, fresher, and private-label food options. Many of its iconic brands, such as Oscar Mayer, Kool-Aid, and Velveeta, are facing declining relevance in the modern market.
In response to these persistent struggles, Kraft Heinz announced it is considering “strategic alternatives,” a move that could potentially lead to a breakup of the company or the sale of certain brands. This signals significant uncertainty about the company’s future structure and direction.
Analyst and Market Sentiment
Overall market sentiment toward Kraft Heinz is cautious, a view echoed by analysts. Cathy Seifert of CFRA Research, who rates Berkshire “hold,” noted the combination of “mediocre results” and a lack of investor confidence. The underperformance of key Berkshire holdings like Jazwares, maker of Squishmallows, which saw a 38.5% revenue drop, underscores the difficult consumer environment that also affects KHC.
Furthermore, Berkshire’s own actions—amassing a near-record $344.1 billion in cash and being a net seller of stocks for eleven straight quarters—indicate a broad-based skepticism about market valuations, which would extend to struggling holdings like Kraft Heinz.
The Investment Question
For a potential investor, the decision to invest in Kraft Heinz is a bet on a turnaround. The stock’s depressed value could present a deep value opportunity if the company successfully revitalizes its brands or unlocks value through strategic actions like a corporate breakup.
However, the risks are significant and clear. The company faces strong headwinds from changing consumer tastes, and its largest and most sophisticated investor has now publicly marked down the value of its stake twice. An investment today would be a move contrary to the signals being sent by Warren Buffett and the prevailing market sentiment. Therefore, a potential investor must weigh the possibility of a successful, but uncertain, turnaround against the significant and publicly acknowledged challenges the company faces.
