Is This Underperforming Warren Buffett Stock Finally a Buy?

Warren Buffett's investment in Kraft Heinz (KHC) hasn't exactly gone as planned. KHC is one of the only Buffett stocks that's negative over the past 3-year and 10-year periods, and the billionaire investor himself has admitted that buying Kraft Heinz was one of his biggest investment mistakes. But things might be looking up for the company that makes everything from ketchup to mac and cheese. 

Word is that Kraft Heinz is getting ready to sell its Oscar Mayer hot dog and lunch meat business for about $3 billion. Sources suggest they've got two interested buyers - JBS SA's Pilgrim's Pride Corp and Sigma Alimentos. This sale could help Kraft Heinz get back on track by focusing on what they do best. The global food industry is huge and getting bigger, with expectations to hit $12.24 trillion by 2024. 

With the stock down 3% Wednesday on poorly received earnings, things seem pretty dire for KHC - but as Buffett himself would say, that's often the best time to buy. And looking at the numbers, KHC stock seems pretty cheap right now. Plus, it offers a healthy dividend yield of 4.60% to reward investors who are willing to wait for better days.

Let’s take a closer look at Kraft Heinz's financial health, strategic initiatives, and Wall Street's sentiment to determine whether this underperforming Warren Buffett stock is finally a buy.

Dissecting KHC's Financial Health

Kraft Heinz (KHC), known for brands like Heinz ketchup, Kraft cheese, and Oscar Mayer meats, has built its business around these household names. They've focused on keeping costs low and running efficiently to stay profitable, even when times are tough.

But KHC, which accounts for 3.5% of the Berkshire Hathaway (BRK.A) equity portfolio, has been a long-term underperformer. This year has been especially rough, with KHC down 8.8% year-to-date - including Wednesday's pullback. Quite a bit of the weakness is tied to lower Lunchables sales, after Consumer Reports flagged concerns over lead and sodium levels back in April.

In its newly released Q3 report, Kraft Heinz reported adjusted EPS of $0.75, which narrowly beat estimates, while revenue of $6.38 billion, down 2.9% annually, fell short. Adjusted operating income was up 1.4%, and adjusted gross profit margin rose 30 basis points to 34.3%.

Organic sales were down 2.2% during Q3, steeper than the expected decline of 2.0%. On a YTD basis, net cash from operating activities rose 6.7% to $2.8 billion at the end of Q3, while free cash flow improved almost 10% to $2.0 billion.

Looking ahead, KHC now expects full-year organic net sales at the low end of its prior guidance, which called for a decline of 2% to flat growth relative to the prior year. Adjusted EPS for 2024 is forecast to range between $3.01 and $3.07, compared to the Wall Street consensus of $3.02.

The negative impact of Lunchables on Q3 results was substantial enough that CEO Carlos Abrams-Rivera told analysts on the conference call, “I think the headwinds have really kind of offset some of the great work that is happening across Kraft Heinz,” and at least one analyst asked the management team to address “the underlying business ex those items” - referencing Lunchables and Capri Sun, which has struggled with a recipe change.

Is KHC Stock Undervalued?

Against this backdrop, the potential sale of its Oscar Mayer unit for approximately $3 billion would be a major move for Kraft Heinz. Notably, Lunchables are a part of the Oscar Mayer umbrella, so any potential sale of that unit would have significant implications for KHC's current brand struggles. This divestiture could also provide Kraft Heinz with additional capital to reinvest in growth areas or strengthen its balance sheet. 

And the stock's current valuation metrics suggest it's a bargain. The stock's forward Price/Earnings (P/E) ratio stands at 11.51, significantly lower than the sector average of 17.7x and its own historical average of 13.3x. The company's Price/Cash Flow ratio of 9.65 is also signaling a discounted valuation.

For income-focused investors, Kraft Heinz offers an attractive dividend yield of 4.60%, based on its quarterly payout of $0.40 per share. That's significantly higher than the Consumer Staples average of 2.99%. KHC has a consistent dividend history of 11 consecutive years of payments.

Wall Street's Verdict on Kraft Heinz Stock

Turning to analyst opinions, Wall Street has a “moderate buy” rating overall. Out of 17 analysts covering the stock, 7 rate it a “strong buy,” 9 suggest a “hold,” and 1 recommends a “strong sell.” 

The average price target for KHC stands at $37.88, representing a potential upside of about 12.3% from the current price.

While Kraft Heinz has faced its share of challenges, the company's strategic moves and commitment to shareholder returns present a compelling case for potential value investors. With a focus on turning around its struggling brands and returning value to shareholders, KHC offers a mix of stability and growth potential. Although Wall Street's outlook is cautious, the stock's current valuation and the prospect of potentially crucial strategic initiatives just might make this Buffett stock worth a closer look for those willing to bet on a turnaround.