One Buffett Stock Has Flown Under the Radar

When Berkshire Hathaway’s holdings are discussed, attention usually flows to the best-known names: Apple (NASDAQ:AAPL), Coca Cola (NYSE:KO) and Bank of America (NYSE:BAC). But one stock that ranks in the top 10 holdings barely gets a mention, yet it may well be worth a closer look now. That stock is Kraft Heinz (NASDAQ:KHC).

It’s not entirely a surprise that Kraft Heinz has flown under the radar. After all, Warren Buffett once stated that he made a mistake when purchasing it. Specifically, the Oracle of Omaha was referring to the price he paid as excessive at the time. But some interpreted the comments to mean Kraft Heinz was a poor purchase and effectively threw the baby out with the bathwater. With its vast array of well-known brands from Heinz ketchup to Philadelphia cheese, that assertion seems to be losing credibility with each passing quarter.

For investors today, Kraft Heinz presents a very different value proposition than when Berkshire Hathaway first snapped up shares around a decade or so ago. In 2013, when Berkshire and private equity firm 3G Capital partnered to first take a stake in Kraft Heinz, the valuation was substantially higher than where it sits today. Indeed, by March of 2015 the company was worth more than double what its market cap is today. Yet the vast array of household name brands under Kraft Heinz’s corporate umbrella that first attracted Buffett continue to form a wide economic moat. So, is Kraft Heinz finally a good buy?

Is It Time to Buy Kraft Heinz?

It’s not often investors get a chance to buy a “Buffett stock” at a better price than the Oracle himself, let alone one that’s more than 50% cheaper but that is precisely the situation facing them now. And there are lots of reasons to whet an investor’s appetite as to why this may be a good deal.

To begin with, Kraft Heinz pays a very chunky dividend these days that amounts to a 4.55% dividend yield, corresponding to an annual payout of $1.60 per share.

Notably, the dividend payout was slashed back in 2019 from 62.5 cents per share to 40 cents per share, a 36% reduction. Notably, the dividend has actually been stable for the past half decade, suggesting the balance sheet issues which had plagued the company are a thing of the past.

At the time of the dividend reduction, management announced that the reason for it was to “provide greater balance sheet flexibility” and it is worth pointing out that debt levels have substantially improved since then. Five years ago, in Q3 2019, long-term debt sat at $27.9 billion whereas the most recent quarterly report revealed that number had fallen to just $19.2 billion.

Less impressively, but still moving in the right direction is the top line, which has seen growth over the same time period from $6.0 billion to $6.4 billion per quarter. Another positive development has been gross margin improvement, up from 32.2% to 35.4%.

It’s clear that management has an eagle eye on the financials now, both with respect to the P&L and the balance sheet, and it appears to be impressing analysts.

How do Analysts Rate Kraft Heinz Now?

The consensus among 21 analysts is that Kraft Heinz has upside to $39.41 per share and 7 analysts upgraded their earnings forecasts for the upcoming quarter.

Zooming out, Kraft Heinz is a $42 billion market capitalization company generating $26 billion in revenues and dropping almost $2 billion of that to the bottom line. Over the next 5 years, net income is forecast to grow at an annual rate of 8.3%.

With management showing clear signs of wanting to unburden the balance sheet by steadily lowering debt levels, and demonstrating a commitment to boosting margins and improving profitability, now may be as good a time as any to buy this Buffett stock at substantially cheaper prices than he paid.

Make no mistake about it, though, Kraft Heinz isn’t the type of stock that is likely to blow away expectations with fast share price movements like NVIDIA or other AI-related companies. This is more a steady eddy that has the potential to pay a handsome dividend, and steadily climb higher over time.