25 Sep

Kraft Heinz Might Be Buffett’s ‘Chronically Leaking Boat’

WRITTEN BY Mohit Oberoi, CFA
  • Kraft Heinz stock has fallen sharply this year. Previously, Warren Buffett admitted that Berkshire Hathaway paid too much for the stock. Berkshire Hathaway is the company’s largest shareholder.
  • 3G Capital, Kraft Heinz’s second-largest shareholder, trimmed its stake in the company.

Kraft Heinz and Warren Buffett

Berkshire Hathaway is Kraft Heinz’s (KHC) biggest shareholder. 3G Capital, the company’s second-largest shareholder, also trimmed its stake. Earlier this year, Buffett admitted that Berkshire Hathaway paid too much for Kraft. However, he also said that the company paid a fair price for Heinz. With 3G Capital trimming its stake in the stock, will Berkshire Hathaway follow suit?

Warren Buffett, Berkshire Hathaway’s (BRK-B) (BRK.B) chairman, is known for his witty quotes. He said, “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.” While Berkshire Hathaway has a low churn, Buffett has exited several companies. Last year, Berkshire Hathaway exited Oracle within a quarter of buying, which isn’t characteristic of Buffett.

Will Buffett also trim stake?

Previously, we discussed Berkshire Hathaway’s different options regarding Kraft Heinz. Read Kraft Heinz: What Are Warren Buffett’s Options? to learn more. Short-term price volatility doesn’t bother Buffett. He’s known for his value investments. Since Berkshire Hathaway reports Kraft Heinz using the equity method, its price movement doesn’t flow into its income statement. Buffett sees companies as businesses and not mere stock tickers. So, whether Berkshire Hathaway exits or adds more Kraft Heinz shares depends on how Buffett views the business.

Kraft Heinz is a “wonderful business”

Earlier this year, speaking with CNBC, Buffett called Kraft Heinz a “wonderful business.” At Berkshire Hathaway’s annual shareholder meeting this year, several questions were raised about the stock. Buffett admitted that private label brands are gaining momentum. He also said that companies like Amazon (AMZN), Walmart (WMT), and Costco (COST) have “gained in power relative to brands.” Meanwhile, Buffett sounded optimistic about the power of the company’s brand. Historically, Buffett prefers companies with strong brands.

At the annual shareholder meeting, Buffett also said that some of Kraft Heinz’s brands are growing slightly while some are witnessing fewer sales. However, he said, “Now it’s true that certain — that there are always trends going to some degree, but they have not fallen apart, remotely. And they have widened the margin somewhat.”

What does Buffett think?

While Buffett sounded optimistic about Kraft Heinz’s business, we also need to look at the price. Speaking with CNBC, Buffett said, “I have absolutely no intention of selling. I’ve got absolutely no intention of buying.” Buffett admitted that it isn’t easy for Berkshire Hathaway to exit the stock given its massive holdings. However, he said, “there are other things I think where you get more for your money and better prospects.”

Now, with 3G trimming its stake in the company, all eyes are on Buffett. Berkshire Hathaway trimming its stake in Kraft Heinz would only add fire to the sell-off. Based on the closing prices on Tuesday, the stock has fallen 32.3% in 2019.

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