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You can judge a person by the company he keeps. The same can be said for an investor.
An investor would be hard pressed to find more desirable company to keep than Warren Buffett. If you can keep company with Warren Buffett and 3G Capital, all the better.
You can keep company with both in Kraft Heinz (NYSE: KHC). Berkshire Hathaway (NYSE: BRK.b) is Kraft Heinz’s largest holding. Berkshire is Kraft Heinz’ largest shareholder. 3G Capital is the second largest shareholder.
You know Warren Buffett; you’re likely unaware of 3G Capital. 3G Capital is worth knowing.
3G Capital runs Kraft Heinz. No management team is better than 3G Capital at imbuing a company with efficiency.
Before Kraft Heinz, 3G Capital imbued the beer industry with efficiency. In a series of acquisitions — AmBev, Interbrew, and then Anheuser-Busch — it created the most efficient, largest beer company InBev.
With the help of Warren Buffett, 3G Capital moved to drive efficiency into the inefficient H.J. Heinz Co. in 2013. Profit margins rocketed by 58% within two years to 28%. Such levels, once thought unobtainable by industry executives, were “revolutionary.” The average margin in the food industry today is 16%, according to Bernstein Research.
With Buffett’s help again, 3G Capital went to work to drive efficiency into Kraft Foods. Kraft and Heinz were combined to form the Kraft Heinz Co. (NASDAQ: KHC) with sales of $26 billion and an equity market cap of $94 billion in 2015.
The 3G Capital culture of driving efficiency has imbued Kraft Heinz. Margins have expanded palpably since the two companies merged.
Returns on invested capital have ascended in the same direction as margins. Earnings are on the rise. Kraft Heinz earned $3.20 per share over the trailing 12 months compared with $2.81 per share in 2016.
Kraft Heinz has paid a dividend from the get-go, and that dividend has been increased annually. The quarterly dividend will be paid at $0.625 per share until next June (when it is all but guaranteed to be raised again). The dividend offers a 3.2% yield.
Tracking Kraft Heinz Shares
Just about everything an investor wants to trend higher trends higher, with one exception — the share price.
Kraft Heinz shares closed their first day of trading on July 25, 2015, at $77.38. They trade at $79 today. Kraft Heinz shares are flat over the past 26 months. The S&P 500 is up 21%.
It wasn’t always that way. Kraft Heinz shares entered 2017 on a rising trajectory. They entered the year trading at $89. By late February, they traded above $97. The price of Kraft Heinz shares has taken a meandering path down to lower ground since then.
It has been a rare off year for 3G Capital and its capable management team.
Management changes have cooled investor enthusiasm. Kraft Heinz recently announced that the chief operating officer (COO) of its U.S. business would transition to a strategic advisor. Suspicion grew that Kraft Heinz would guide for lower earnings.
On a macro level, food brands have been pressured by retailers’ drive for efficiency.
Investors are concerned that major food brands have lost leverage with retailers as a result of Amazon.com (NASDAQ: AMZN) acquiring Whole Foods.
The concerns are overdone.
Top Positions in Food
The Kraft side of the business holds unprecedented market strength. Kraft holds the number 1 or 2 market position in 17 food categories.
The Heinz side complements the Kraft side. Kraft is weak internationally, Heinz is strong.
Heinz holds the number 1 position in the ketchup category globally. International markets are an important contributor to Heinz, contributing 61% to its sales, including a 25% contribution from emerging markets.
I expect 3G Capital’s insatiable desire for efficiency to expand margins across the board. I expect Kraft Heinz to realize significant margin expansion over the next few years as synergies and efficiency programs (including zero-based budgeting and streamlined manufacturing) create annual cost savings.
Rarely has it been profitable to bet against Warren Buffett or 3G Capital. Now is not the time to start.