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Kraft Heinz Continues to Compound Berkshire’s Problems

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Aug. 8 2019, Updated 3:03 p.m. ET

  • Today, Kraft Heinz reported its earnings for the first half of 2019. Berkshire Hathaway is KHC’s biggest shareholder.
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Kraft Heinz

Kraft Heinz (KHC) reported its earnings results for the first half of 2019 today before the market opened. The company reported revenue of $12.4 billion in the period—a year-over-year fall of 4.8%. Its operating income fell 54.6% in the period. CEO Miguel Patricio said in an earnings release, “The level of decline we experienced in the first half of this year is nothing we should find acceptable moving forward.” Kraft Heinz stock opened sharply lower today. The stock has lost 26.3% of its market cap based on yesterday’s closing price.

Write-off

Kraft-Heinz announced impairment losses of $598 million in the second quarter. Its impairment charges totaled $1.2 billion in the first half of 2019. Earlier this year, KHC reported a $15.4 billion write-down on its earnings call for the fourth quarter of 2018. It also announced that it had missed earnings estimates and revealed a subpoena from the US Securities and Exchange Commission on the call. The stock tumbled following its fourth-quarter earnings release.

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Berkshire Hathaway is Kraft Heinz’s biggest shareholder

Berkshire Hathaway (BRK.B) is Kraft Heinz’s biggest shareholder and holds more than one-quarter of KHC shares. It consolidates Kraft Heinz using the equity method. Earlier this year, Berkshire Chair Warren Buffett admitted that he was wrong about the company. However, Buffett noted that Berkshire Hathaway would neither buy nor sell KHC shares. Berkshire Hathaway missed its second-quarter earnings estimates. Buffett is underperforming the markets by a wide margin this year.

Berkshire Hathaway’s second-quarter earnings release

During Berkshire Hathaway’s second-quarter earnings release, it noted that the trade war had hurt its earnings. It also said, “We evaluated our investment in Kraft Heinz for impairment as of June 30, 2019.” The company added, “Based on the available facts and information, the length of time that fair value was less than carrying value and our ability and intent to hold the investment until recovery, we concluded that recognition of an impairment loss in earnings at June 30, 2019 was not required.” After KHC’s earnings and write-down, Berkshire might also have to lower its carrying value.

Buffett has faced criticism over Kraft Heinz

Some analysts have criticized Buffett over Berkshire’s recent underperformance. Jim Cramer called upon Buffett to play an active role in the companies Berkshire holds. Cramer especially pointed to KHC, Coca-Cola, and Wells Fargo. Meanwhile, Berkshire’s cash pile has continued to rise in the second quarter. Buffett is looking at outright acquisition opportunities. However, such deals have apparently been tough to come by.

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