The Dow Jones Industrial Average ($DOWI) rallied to yet another record high today, as the “Trump trade” rolls on. Despite uneasiness over new tariff threats, investors are cheering the president-elect's announcement of hedge fund executive Scott Bessent as the Treasury Secretary in his upcoming administration, along with signs of an imminent Israel-Hezbollah ceasefire.
While several stocks are trading near their record highs following the election results, Kraft-Heinz (KHC) continues to sag, and is down 13.6% for the year.
KHC is in the red over the last one-year, two-year, and three-year periods, and is just barely in the green on a five-year basis. The stock has been a perennial underperformer, previously losing 9% in 2023 while broader markets delivered double-digit returns.
Warren Buffett’s Berkshire is Losing Money on Its Kraft-Heinz Investment
Kraft-Heinz is among the top 10 equity holdings at Berkshire Hathaway (BRK.B), and even Warren Buffett admitted that he overpaid for Kraft during the merger with Heinz. When Kraft-Heinz started trading in 2015 as a merged entity, it opened at $71—over twice the current price level, but less than a third of its all-time highs in 2017.
One small comfort for KHC investors is its fat dividend yield, which currently stands at 5%. Notably, KHC slashed its dividends in 2019, but still yields well over three times the average S&P 500 Index ($SPX) stock. However, despite these dividends, the company has failed to make any money for investors since the merger.
What’s Wrong With KHC?
There’s plenty wrong with Kraft-Heinz, and the price action is the testimony to the company’s troubles. Consumers have been trading down to lower-priced brands, as well as smaller packages, amid tough economic conditions, and Kraft-Heinz does not expect things to improve much next year either.
Kraft-Heinz has been losing domestic market share as a result. The company’s volumes fell in both 2022 and 2023, and this year looks no different. During the Q3 earnings call, Kraft-Heinz admitted that the recovery in its business is taking longer than it expected.
Moreover, new troubles have kept popping up for Kraft-Heinz, and the company wrote down the value of its “Lunchables” brand during Q3. The company had brought the brand to school menus, estimating it to be a $25 billion market.
Lunchables Faced Backlash from Consumer Groups
However, consumer groups lashed out at Kraft-Heinz for adding it to school systems, and last year, the Center for Science in the Public Interest said that Lunchables “undermine school nutrition programs.” If that wasn't enough, Consumer Reports found high levels of lead, sodium, and cadmium in the store versions of the product. The final straw came earlier this month, when Kraft-Heinz discontinued Lunchables in schools amid low demand.
During the Q3 earnings call, CEO Carlos Abrams-Rivera said, “The negative publicity that we received from that misleading interest group appears to be lingering longer.” He admitted to higher competition in that space, while adding, “This is a brand that is focused on families and kids, so rebuilding that trust just takes some time.”
Notably, Lunchables is facing intense competition, including from Lunchly, which is owned by popular YouTubers Logan Paul, KSI, and MrBeast.
Apart from the weak business environment, where its organic sales are sliding while profits are expected to stay flat in both 2024 and 2025, KHC also has a strained balance sheet, with nearly $20 billion in debt.
Kraft Heinz Stock is Cheap for a Reason
Kraft-Heinz stock trades at a next 12-months (NTM) price-to-earnings (PE) multiple of 10.6x, which would appear cheap not only compared to broader markets, but also to peers like General Mills (GIS) and Mondelez International (MDLZ). However, the stock trades at a depressed valuation because of its sagging business and a massive debt pile.
KHC Stock Forecast
Sell-side analysts have been turning incrementally bearish on KHC. It's currently rated as a “Strong Buy” by only 5 analysts, while the corresponding number 3 months back was 8.
Earlier this month, Piper Sandler downgraded Kraft-Heinz to a “hold,” as the company’s recovery did not play out as the brokerage expected. Overall, analysts have given Kraft-Heinz a consensus rating of “Moderate Buy,” while its mean target price of $36.12 is almost 13% higher than today’s closing prices.
In my previous article, I noted that KHC has limited downside, and would stand with that thesis. However, I don’t foresee stellar returns from the company, as the retail landscape has changed considerably over the past few years, with legacy brands like Kraft-Heinz no longer enjoying the kind of moat and pricing power that they once did.
I would sum up by adding that it might be tough to make meaningful money with Kraft-Heinz, even as the stock can still find a place in the portfolios of those looking for a relatively safe stock with a fat dividend yield.
