Kraft Heinz’s Buffett glow may be fading

Kraft Heinz Co. represents all that is wrong with aspects of corporate America. So why does Warren Buffett like the stock?
The US markets and economy may be holding up, but there’s a corner of the business world with an unsettling combination of factors: few growth opportunities, resistance to new customer trends, ruthless cost-cutting to make up for revenue shortfalls, a willingness to do high-stakes deals that whiff of desperation and an increasing comfort with eye-popping levels of debt. Kraft Heinz is most emblematic of this.
The $78 billion food conglomerate reported second-quarter sales and earnings that beat expectations, and that of course had shareholders cheering. But a closer inspection of the results shows that Kraft Heinz has made little headway in making its products more appealing to modern grocery shoppers, who are seeking fresher, less processed and more nutritious options —demand that probably isn’t going away. Instead, the company’s big ideas are things like tinkering with ways to push Lunchables and bringing back Planters Cheez Balls, not quite addressing broader consumer trends.
Kraft Heinz said total company sales rose 0.7 percent in the quarter, though growth was negative excluding currency and deal benefits, even in the face of price increases. US revenue fell nearly 2 percent. International regions posted strong gains, but they carry little weight in a business that relies on North America for more than three-quarters of its revenue and Ebitda.
While Kraft Heinz could — and probably will — go deeper into debt to do a synergistic mega-merger in a roundabout way of boosting profit, that doesn’t get to the root of the problem. In fact, according to the New York Post, Kraft Heinz already has its eye on the
beleaguered Campbell Soup Co, which if true is a sign that the company still isn’t prioritising the sort of sustainable, long-term growth favored by investors like Buffett.
It’s a surprise that Buffett’s Berkshire Hathaway Inc. is still Kraft Heinz’s No. 1 shareholder, and it’d be even more surprising
if Berkshire helps bankroll the next deal. (Remember, Berkshire helped finance 3G Capital’s buyout of H.J. Heinz in 2013 and the merger two years later of Heinz and Kraft Foods. Berkshire itself
is scheduled to report second-quarter results.
Borrowing at Kraft Heinz remains quite high, while Campbell Soup also faces a mountain of debt following a desperate deal for snack maker Snyder’s-Lance earlier this year, which was orchestrated by a CEO who left abruptly soon afterward. Campbell is still searching for a permanent successor and has reportedly found itself targeted by activist investor Dan Loeb’s Third Point LLC in the meantime. Like Kraft Heinz, Campbell gets most of its revenue from the US, and its most well-known products have waned in popularity. It really doesn’t check any boxes for Kraft Heinz except that it would allow the private equity managers from 3G to take a razor to the business’s costs, particularly overhead such as employees. Still, I don’t see the appeal of a deal or why Buffett would support that strategy.

— Bloomberg