Kraft Heinz Company (KHC)

[FUNMAN]

5 Bargains in Berkshire's Portfolio
We think these holdings look undervalued.

Susan Dziubinski
Aug 20, 2020

To read about more than KHC, read the article at this link:

https://www.morningstar.com/articles/998412/5-bargains-in-berkshires-portfolio

Last week, Berkshire Hathaway (BRK.A)/(BRK.B) released its second-quarter 13-F. Morningstar's resident Berkshire specialist, Gregg Warren, noted that the behemoth was a net seller of equities during the quarter. True, Berkshire picked up shares of Barrick Gold (GOLD) and bumped up its stakes in Liberty SiriusXM (LSXMA), Store Capital (STOR), Kroger (KR), and Suncor Energy (SU). However, each of these pickups accounts for less than 1% of Berkshire's portfolio, reminds Warren.

As for sales, Warren Buffett revealed during Berkshire's virtual annual meeting that the team had sold its entire airline stake in April. Moreover, Berkshire jettisoned its stake in Goldman Sachs (GS) and trimmed its overall exposure to financials stocks during the quarter.

Given the market's exceptional bounceback during the second quarter, bargains are less bountiful than they were three months ago. That said, here's a look at a handful of stocks in Berkshire Hathaway's portfolio that are undervalued by our standards.

Kraft Heinz Company (KHC)
Morningstar Rating (as of Aug. 18, 2020): 4 stars
Morningstar Economic Moat Rating: None

"Five years have passed since the marriage between Kraft and Heinz. Although the initial motivation of the tie-up was enhanced profitability (which ultimately impaired its competition position), we believe the firm is charting a new course following the appointment of CEO Miguel Patricio in 2019. Patricio has yet to make his strategic agenda public, but we don't believe that implies Kraft Heinz has pushed pause on efforts to steady its ship.

"We still expect the strategic playbook to be anchored in pursuing sustainable efficiencies versus blindly rooting out costs as the company elevates brand spending (marketing and product innovation) and enhances its capabilities (category management and e-commerce). We continue to expect marketing, research, and development to expand to more than 5% of sales in the aggregate over our 10-year forecast versus less than 5% the past few years.

"Packaged food players as well as grocery stores have suggested that consumers have increasingly sought out trusted brands (like those in Kraft Heinz's mix) since the onset of the pandemic, in line with the boost in household penetration and repeat purchase rates that Kraft Heinz has experienced. However, we expect the recent pace of gains prompted by COVID-19 stock-up trips will slow over the next several quarters as consumers work through their pantries and resort to away-from-home food consumption as social distancing mandates are eased.

"We don't expect Kraft Heinz to merely ride these tailwinds. Rather, we view this environment as an opportunity to pick up the pace on the change that has just gotten underway at the organization. We've been encouraged by Kraft Heinz's renewed commitment to enhance its service levels with retail customers--relationships that had been tarnished under prior leadership. This aim has gained heightened importance against the current backdrop, evidenced by the decision to focus manufacturing assets on the company's highest-turning stock-keeping units and even to enlist the help of co-manufacturers (despite the higher cost). We view this as prudent."