Is Craft Heinz Stock Undervalued in 2025? Warren Buffett’s Investment Analysis and Potential Growth Opportunity

 

Warren Buffett's Investment Portfolio: Is Craft Heinz Stock Now a Bargain?

Warren Buffett, one of the world's most successful investors, is known for his long-term investment strategy and his ability to identify undervalued stocks. However, within his portfolio, there’s one major position that has seen significant declines in value, potentially making the stock incredibly cheap. This raises the question: is this a potential investment opportunity? In this analysis, we will review that stock and also explore some of the other investments Warren Buffett has made. Let’s dive in.

Craft Heinz: A Key Player in Warren Buffett’s Portfolio

Craft Heinz is a global leader in the production and marketing of food and beverage products. It represents the eighth-largest position in Warren Buffett’s portfolio, accounting for 4.29% of his holdings. Buffett is, by far, the largest shareholder of the company, owning around 27% of the shares. Despite a trend of selling off other stock positions in recent years to invest in Treasury bills, Buffett has not sold a single share of Craft Heinz. In fact, he has never done so since Kraft and Heinz merged a decade ago.

One of the most intriguing aspects of Craft Heinz is its nearly 70% decline in stock value since 2017. The company is currently trading with a Price-to-Earnings (P/E) ratio of 10, the lowest it has had in quite some time. This could signal that the stock is undervalued and potentially ripe for investment.

Understanding Craft Heinz’s Business Model

Craft Heinz’s business model is straightforward: the company purchases raw materials, processes them into finished products like condiments and prepackaged foods, and then sells them at a premium price. In addition to the well-known brands of Kraft and Heinz, Craft Heinz owns many other brands, including some of the following: [Insert Other Brands]. The company’s revenue is divided into several categories, with 34% of its income coming from sauces and condiments—most notably Heinz ketchup, mustard, and mayonnaise, along with other brands like Orlando tomatoes. Another 15% comes from cheeses and dairy, particularly the Philadelphia and Kraft brands. 11% of its revenue comes from ambient food products such as prepared meals and canned goods. The rest of its sales come from frozen foods, meats, seafood, beverages (including soft drinks and juices), baked goods, desserts, and coffee.

In terms of geographical revenue distribution, the majority of sales come from the United States. Interestingly, when comparing companies in the fruit and vegetable sector, we found that their net profit margins were relatively low due to competition based mainly on price. However, in the case of Craft Heinz, its net margin stands at 13%, which is considerably higher than many other companies in the sector. This suggests that the company has some pricing power, allowing it to sell its products at higher prices than private-label brands. This, in turn, demonstrates that its brands hold significant brand equity.

Threats and Strengths of Craft Heinz

Threats: One of the primary threats facing Craft Heinz is the competition from private-label or store brands. While their presence in the U.S. is relatively small, they could grow, as they have in Europe. Compared to giants like Nestlé or PepsiCo, which have strong competitive advantages, Craft Heinz’s net margin is reasonable, but its Return on Capital Employed (ROCE) is lower. This suggests that its competitive advantage is not as strong as that of other major players in the sector. In terms of substitute threats, there doesn’t appear to be a significant risk of declining demand for condiments and sauces, as consumers tend to continue purchasing these products regardless of economic conditions.

Strengths: One of Craft Heinz’s key strengths is the stability and recurrence of demand for its products. The food industry is considered a recession-proof sector: people will continue purchasing food, even when prices increase due to inflation or economic downturns. This provides the company with a strong foundation for growth.

Craft Heinz’s CEO and Leadership Team

Carlos Abrams Rivera took over as the CEO of Craft Heinz in late 2023. He had previously worked for the company in various roles, including President of North America. Rivera has vast experience in the industry, having worked at companies such as Campbell Soup, Mondelez, and Kraft Foods. Although the leadership post-merger of Kraft and Heinz wasn’t ideal, the situation has improved since Miguel Patricio assumed the role of CEO in 2019. However, there are still some doubts regarding whether the current leadership will be able to significantly improve the company’s performance in the future.

Regarding the management team's stake in the company, it's worth noting that the value of their stock holdings is roughly equal to their annual salaries. While this isn’t necessarily a negative, it would be preferable if they had a larger equity stake to better align their interests with those of shareholders. Furthermore, there hasn’t been a significant amount of insider buying, which could indicate that executives aren’t overly confident in the stock at this time.

Craft Heinz’s Financial Performance

Historically, the food sector has shown resilience during economic downturns. Craft Heinz has successfully maintained its profits during previous crises such as the 2008 financial crash and the 2020 pandemic. However, the company’s performance since the Kraft and Heinz merger has been underwhelming. In 2024, profits are declining, and sales have dropped by 2.5% compared to the previous year. That said, the company has pointed out that the decline is concentrated in just five of its brands, while other brands have remained stable.

The company made significant divestitures in 2019 and 2021, selling off businesses like natural cheeses to Lactalis for $3.3 billion. These sales have helped keep profits steady despite declining revenues. Excluding these divestitures, Craft Heinz has managed to grow sales and profits at an annual rate of 5% since 2020, primarily due to price increases that have been above 6% annually. However, unit volumes sold have slightly declined.

Craft Heinz Stock Valuation: Is It a Good Investment?

The stock price of Craft Heinz has experienced substantial declines, but it has also been overvalued at certain points in recent history, with a P/E ratio as high as 30, which was too expensive for a company with moderate and predictable growth. Currently, the stock’s valuation seems more reasonable, with a P/E ratio of 10. This suggests that the stock could be undervalued compared to its performance. If the company can maintain modest annual growth of 2% through price hikes, the true value of the stock could reach between $44 and $45 by 2029, representing a potential growth of 51% by that time.

Conclusion: Is Craft Heinz Stock a Solid Investment?

Despite experiencing significant stock price declines and facing challenges in terms of sales growth and competition from private-label brands, Craft Heinz stock could be an excellent investment opportunity if the company can maintain stable sales volumes. Annual profitability could deliver returns of around 15%, making it an attractive long-term option, provided that the company can preserve its profit margins and avoid further declines in sales in the future.

In addition to Craft Heinz, Warren Buffett holds a variety of other stocks in his portfolio, including Apple, American Express, Coca-Cola, and several others—some of which have performed exceptionally well in recent years.

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