Kraft Heinz: Buffett & 3G Capital
10/20/2017 5:00 am EST
Berkshire Hathaway (BRK.B), led by Warren Buffett, owns 325.6 million, or 26.7%, of Kraft Heinz outstanding shares. 3G Capital owns 24.3%.
Berkshire is Kraft Heinz’s largest investor; Kraft Heinz is Berkshire’s largest stock investment. With Buffett’s help, 3G Capital has gone to work to drive efficiency into Kraft Foods.
The 3G Capital culture of driving efficiency has imbued Kraft Heinz. Margins have expanded palpably since the two companies merged.
Returns on invested capital have ascended in the same direction as margins. Earnings are on the rise. Kraft Heinz earned $3.12 per share over the trailing 12 months compared with $2.81 per share in 2016.
Kraft Heinz has paid a dividend from the get-go, and that dividend has been increased annually. The dividend now offers a 3.2% yield.
Just about everything an investor wants trending higher with Kraft Heinz is trending higher, with one exception — the share price.
Kraft Heinz shares closed their first day of trading on July 25, 2015, at $77.38 and are flat over the past 26 months. The S&P 500 is up 21% over the same time.
It has been a rare off year for 3G Capital and its capable management team. Kraft Heinz made a surprise run on U.K-based food and consumer products giant Unilever (UL) this past February.
The offer was rebuffed, though. Investors are disappointed. Warren Buffett is likely the reason. One of Buffett’s guiding investing principles is to avoid hostile deals.
On a macro level, food brands have been pressured by retailers’ drive for efficiency. We think that the concerns are overdone, though. The Kraft side of the business holds unprecedented market strength. Kraft holds the number 1 or 2 market position in 17 food categories.
Seven brands generate over $1 billion in annual sales: Kraft, Velveeta, Oscar Meyer, Philadelphia, Planters, Maxwell House and Lunchables. Kraft Foods products have a 98% household penetration in North America.
We expect 3G Capital’s insatiable desire for efficiency to expand margins across the board. We expect Kraft Heinz to realize significant margin expansion over the next few years. Rarely has it been profitable to bet against Buffett or 3G Capital. Now is not the time to start.