Is Kraft Heinz a Value Trap?

My definition of a value trap is a cheap stock in a company that makes lots of money but does not grow. Interestingly, long-time Buffett favorite Kraft Heinz (KHC) displays some of those characteristics.

For instance, Mr. Market paid $37.21 for the Kraft Heinz Co (NASDAQ: KHC) on 4 March 2021. Yet Kraft Heinz reported a quarterly gross profit of $2.523 billion and a quarterly operating income of $1.55 billion on 31 December 2020. In addition, Kraft Heinz reported quarterly revenues of $6.939 billion on 31 December 2020.

Conversely, Kraft Heinz can grow, its quarterly revenues grew from $6.536 billion on 31 December 2019 to $6.939 billion on 31 December 2020. Similarly, the quarterly operating income grew from $594 million on 31 December 2019 to $1.55 billion on 31 December 2020.

Why is Kraft Growing?

Stockrow estimates that Kraft Heinz’s revenues grew by 6.17% in the quarter ending on 31 December 2020. Interestingly, Kraft’s revenues grew for all three quarters in 2020. For instance, Kraft reported a revenue growth rate of 3.32% on 31 March 2020 and 6.01% on 30 September 2020.

Thus, Kraft Heinz’s revenues grew during a pandemic is impressive. My guess is the revenues grew because frightened people trapped at home wanted comfort food such as Kraft Dinner (macaroni and cheese to Americans). In addition, Kraft foods are easy to cook.

Additionally, Kraft Heinz’s share price grew from $26.07 on 2 March 2020 to $37.21 on 4 March 2021. Thus, Mr. Market has noticed Kraft Heinz’s growth and is buying it.

Is Kraft Heinz Making Money?

Okay, so Kraft Heinz (KHC) grows, but does it make money?

Kraft Heinz reported a $1.603 billion quarterly operating cash flow on 31 December 2020. In 2020, the quarterly operating cash flow rose from $1.562 billion on 31 December 2019.

In contrast, Kraft Heinz began 2020 with a negative quarterly ending cash flow of -$36 million on 31 December 2019. The company finished 2020 with a quarterly ending cash flow of $6.97 billion.

However, Kraft Heinz reported a quarterly financing cash flow of $3.105 billion on 31 March 2020. That shows borrowing. However, they paid the financing right back.

Kraft Heinz reported quarterly financing cash flow of -$4.542 billion on 30 June 2020. The company finished 2020 with a quarterly financing cash flow of -$822 million on 31 December 2020. Interestingly, Kraft Heinz finished 2020 with slightly less long-term debt than it began with. Kraft Heinz had long-term debts of $28.216 billion on 31 December 2019 and $28.07 billion on 31 December 2020.

What Value Does Kraft Heinz Have?

The Kraft Heinz Company (KHC) had $3.417 billion in cash and short-term investments and $99.83 billion in total assets on 31 December 2020.

Interestingly, Kraft’s assets shrank, but its cash grew in 2020. Kraft Heinz had total assets of $101.45 billion and $2.279 billion in cash and short-term investments on 31 December 2019.

Hence, Kraft has little more cash, but its actual value fell. On other hand, I think Kraft’s real value is in all the iconic brands and products it owns.

Those brands include Kraft Dinner, Oscar Mayer, Ore-Ida, Craft Macaroni & Cheese, Kool-Aid, Jell-0, Velveeta, Classico, Grey Poupon, Philadelphia Cream Cheese, Planters Peanuts, and Maxwell House Coffee. I think chaotic times such as ours make such brands more valuable because people want familiarity, nostalgia, and the illusion of stability they offer when the times get crazy.

Is Buffett Right about Kraft Heinz?

One person who still believes in the Kraft Heinz Co. (NASDAQ: KHC) is Warren Buffett.

KHC was Berkshire Hathaway’s (NYSE: BRK.B) fifth-largest stock holding in the 4th Quarter of 2020. Dataroma estimates, Berkshire Hathaway (BRK.A) owned 325.634 million shares of Kraft Heinz in the fourth quarter of 2020.

I think Berkshire owns KHC because Mr. Market undervalues it and the company makes money. Moreover, I consider Kraft Heinz an excellent dividend stock.

Kraft Heinz will pay a 40¢ quarterly dividend on 26 March 2021. Thus, Kraft Heinz pays a 40¢ dividend during a pandemic. Overall, Kraft Heinz offered $1.60 forward annualized dividend and a 4.31% dividend yield on 3 March 2020.

In the final analysis, I think Buffett is right about Kraft Heinz. I consider Kraft Heinz a good income and value investment with a high margin of safety because of its growth. If you want a cheap value and income investment with growth potential, you need to investigate Kraft Heinz.