Musings on markets the perils of investing idol worship the kraft heinz lessons! electricity in water


On February 22, Kraft Heinz shocked investors with a trifecta of bad news in its earnings report: sub-par operating results, a mention of accounting irregularities and a massive impairment of goodwill gas 4 weeks pregnant, and followed up by cutting dividends per share almost 40%. Investors in the company reacted by selling their shares, causing the stock price to drop more than 25% overnight. While Kraft is neither the first, nor will it be the last company, to have a bad quarter, its travails are noteworthy for a simple reason. Significant portions of the stock were held by Berkshire Hathaway (26.7%) and 3G Capital (29%), a Brazil-based private equity group. Berkshire Hathaway’s lead oracle is Warren Buffett, venerated by some who track his every utterance, and try to imitate his actions. 3G Capital might not have Buffett’s name recognition, but its lead players are viewed as ruthlessly efficient managers, capable of delivering large cost cuts. In fact, their initial joint deal to bring together Heinz and Kraft, two of the biggest names in the food gas efficient cars 2010 business, was viewed as a master stroke, and given the pedigree of the two investors, guaranteed to succeed. As the promised benefits have failed to materialize, the investors who followed them into the deal seem to view their failure as a betrayal.

You don’t have to like ketchup or processed cheese to know that Kraft and Heinz are part of American culinary history. Heinz, the older of the two companies, traces its history back to 1869, when Henry Heinz started packing and selling horseradish, and after a brief bout of bankruptcy, turned to making 57 varieties of ketchup. After a century of growth and profitability, the company hit a rough patch in the 1990s, and was targeted by activist investor, Nelson Peltz, in 2013. Shortly thereafter, Heinz was acquired by Berkshire Hathaway and 3G Capital for $23 billion, becoming a private company. Kraft started life as a cheese company in 1903, and over the next century, it expanded first into other dairy products, and then widened its repertoire to includes other processed foods. In 1981, it merged with Dart Industries, maker of Duracell batteries gas oil mix ratio chart and Tupperware, before it was acquired by Philip Morris in 1988. After a series of convulsions, where parts of it were sold and rest merged with Nabisco, Kraft was spun off by Philip Morris (renamed Altria), and targeted by Nelson Peltz (yes, the same gentleman) in 2008. Through all the mergers, divestitures and spin offs, managers made promises of synergy and new beginnings, deal makers made money, but little of substance actually changed in the products.

With the bad e payment electricity bill up news in the earnings report still fresh, let’s consider the implications for the story for, and the value of, Kraft Heinz. The flat revenues and the declining margins, as I see them, are part of a long term trend that will be difficult, if not impossible, to reverse. While Kraft-Heinz may have a quarter or two with positive blips, I see more of the same going forward. In my valuation, I have f orecast a revenue growth of 1% a year in perpetuity, less than the inflation rate, reflecting the headwinds the company faces. That downbeat revenue growth story will be accompanied by a matching “bad news” story on operating margins, where the company will face pricing pressures in its product markets, leading to a drop (though a small and gradual one) in operating margins over time, from 22% in 2018 (already down from 2017) to 20% over the next five years. The company’s cost of capital is currently 6%, reflecting the nature of its products and its use of debt, but over time electricity facts for 4th graders, the benefits from the latter will wear thin, and since that is close to the average for the industry (US food processing companies have an average cost of capital of 6.12%), I will leave it unchanged. Finally, the mistakes of the past few years will leave at least one positive residue in the form of restructuring charges, that I assume will provide partial shelter from taxes, at least for the next two years.

• It is human electricity 2015 to err: At the risk of stating the obvious, Warren Buffett and 3G’s key operators are human, and are prone to not only making mistakes, like the rest of us, but also to have blind spots in investing that hurt them. In fact, Buffett has been open about his mistakes, and how much they have cost him and Berkshire Hathaway shareholders. He has also been candid about his blind spots, which include an unwillingness to invest in businesses that he does not understand, a sphere that only grows as he gets older and the economy changes, and an excessive trust in the managers of the companies that he invests in. While he is, for the most part, an excellent judge of character, his investments in Wells Fargo, Coca Cola and Kraft-Heinz show that he is not perfect. The fault, in my view, is not with Buffett, but with the legions of investors, analysts and journalists who treat him as an investment deity, quoting his words as gospel and tarring and feathering anyone who dares to question them.

• Stocks are not k gas cylinder bonds: In my data posts, I looked at how companies in the United States have moved away from dividends to buybacks, as a way of returning cash. That trend, though, has not been universally welcomed by investors, and there remains a significant subset of investors, with strategies built around buying stocks with big dividends. One reason that stocks like Kraft Heinz become attractive conservative value investors is because they offer high dividend yields, often much higher than what you could earn investing in treasury or even safe corporate bonds. In effect, the rationale that investors use is that by buying these shares, they are in effect getting a bond (with the dividends replacing coupons), with price appreciation. From the Dogs of the Dow to screening based upon dividend yields, the underlying premise is that investors can count more on dividends than on buybacks. While it is true that dividends are stickier than buybacks, with many companies maintaining british gas jokes or increasing dividends over time, these dividend-based strategies become delusional when they treat dividends as obligated payments, rather than expected ones. After all, much as companies do not like to cut dividends, they are not contractually obligated to pay dividends. In fact, when a stock carries a dividend yield that looks too good to be true, it is usually almost always an unsustainable dividends, and it is only a question of time before dividends are cut (or even stopped) or the company drives itself into a financial ditch.

• Brand Names last a long time, but nothing lasts forever: A major lodestone of conventional value investing is that while technology, cost efficiencies and new products are all competitive advantages that can generate value, it is brand name that is the moat that has the most staying power. Again, that statement reflects a truth, which is that brand eon gas card top up names last long, often stretching over decades, but even brand name benefits fade, as customers change and companies seek to become global. The troubles at Kraft-Heinz are part of a much bigger story, where some of the most recognized and valued brand names of the twentieth century, from Coca Cola to McDonalds, are finding that their magic fading. Using my life cycle terminology, these companies are aging and no amount of financial engineering or strategic repositioning is going to make them young again.

• Cost cutting can take you far, but no further: For the last few decades, we have cut a great deal of slack for those who use cost cutting as their pathway for creating value, with many leveraged buyouts and restructurings built almost entirely on its promise. Don’t get me wrong! In firms with significant electricity voltage in canada cost inefficiencies and bloat, cost cutting can deliver significant gains in profits, but even with these firms, those gains will be time limited, since there is only so much fat to cut out. Worse, there are firms that find themselves in trouble for a myriad of reasons that have little to do with cost inefficiencies and cutting costs as these firms is a recipe for disaster. It is true that 3G did a masterful job, cutting costs and increasing margins at Mexico’s Grupo Modelo, the Mexican brewer that they acquired through Inbev, but that was because Modelo’s problems lent themselves to a cost-cutting solution. It may even power quiz questions have worked at Kraft-Heinz initially, but at this point, the company’s problems may have little to do with cost inefficiencies, and much to do with a stable of products that is less appealing to customers than it used to be, and cost cutting is the wrong medicine for whatever ails them.