Investors as successful as Warren Buffett attract constant attention. As a result, it’s difficult to find a stock the Oracle of Omaha owns trading at a bargain price.
I think that there’s a rare opportunity right now, though. I think the market is overlooking one of Buffett’s biggest stock investments.
Kraft Heinz (NASDAQ:KHC) is often thought to be one of Buffett’s biggest investment mistakes. But in my view, the stock has never been better value and I doubt it ever will be.
Kraft Heinz
As an investor, there’s a lot to like about Kraft Heinz. Firstly (and most obviously) it’s a company in a defensive sector.
No investment is entirely immune from economic and business cycles. But food businesses tend to enjoy relatively stable demand, which I see as a good thing.
The biggest risk with Kraft Heinz shares is that inflation might weigh on its margins. But the company is investing heavily in its brands, which should help support its profitability.
Those brands also allow Kraft Heinz to earn good returns. The business typically generates between $4bn and $5bn in operating income using around $6bn in fixed assets.
There’s also a dividend, which has a 4% yield at today’s prices. And from an investment perspective, I don’t think the stock has ever been better.
Value
As Buffett says, a stock being a good investment isn’t about whether it goes up or down. What matters for an investor is the underlying business and the cash it will produce.
Back in 2020, the stock was down around $22 per share. But I’d argue that it has never been better value from an investment perspective than it is now.
The stock might have been cheaper in 2020, but the underlying business was in worse shape. The company was about to take a $3bn writedown in the value of its brands.
On top of that, it had a lot of debt. In 2021, almost half the company’s operating income went on making interest payments on its debt.
Fast forward to today and things are much improved. Total debt is down by 30% and interest payments account for less than around 20% of operating income.
Kraft Heinz shares were certainly cheaper in 2020. But on the basis of the company’s improved balance sheet, I’d argue that it’s a more compelling value proposition today.
Outlook
I think Kraft Heinz shares are the best value they’ve ever been, but could they be better value in future? It’s difficult to say for certain, but I don’t see it as likely.
Outside of a stock market crash, I think that Kraft Heinz shares are likely to go up from here.
So far, the market has largely been ignoring the company’s moves to lower its total debt. But I think that will change soon.
I expect a stronger balance sheet to lead to higher shareholder returns, either through dividends or share buybacks. And I think this will cause investors to take note.
That’s why I’m not hanging around with Kraft Heinz shares. I’m buying them for my portfolio at today’s prices, since I don’t know how long the opportunity will last.
