Kellanova, a huge consumer packaged goods company, has been acquired by Mars, and K stock is expected to be delisted soon, as its acquisition closed yesterday, Dec. 11. Consequently, the former owners of K stock may be thinking of looking to buy Kraft Heinz (KHC), which is the closest publicly traded alternative to Kellanova.
About KHC Stock
Kraft Heinz, as its name indicates, owns and markets the Kraft and Heinz brands. It also has many other consumer packaged food brands, such as Oscar Mayer, Jell-O, and Philadelphia Cream Cheese. The company has a market capitalization of $28.7 billion.
In the third quarter, KHC's sales dropped slightly to $6.237 billion from $6.383 billion during the same period a year earlier. However, its operating cash flow did increase to $3.09 billion from $2.8 billion.
In September, the company announced that it would split itself “into two scaled, focused companies.” One firm will include the Heinz, Philadelphia, and Kraft Mac & Cheese brands, “with approximately 75% of (its) net sales coming from sauces, spreads and seasonings.” The other spun-off company will feature the Oscar Mayer, Kraft Singles, and Lunchables brands. In 2024, the two firms generated EBITDA, excluding some items, of about $4 billion and roughly $2.3 billion, respectively.
According to KHC, the move will allow the two spun-off entities to be more focused and efficient.
Warren Buffett's Berkshire Hathaway (BRK.A) (BRK.B) owned 27.5% of KHC as of September. Also in September, CNBC reported that KHC had lost over two-thirds of its value since the merger that formed Kraft Heinz in 2015, which Berkshire helped engineer, was finalized.
The Threats Facing KHC Stock
In an interview with CNBC in September, Buffett would not dismiss the possibility of Berkshire selling part of its stake or its entire stake in the firm. Obviously, if Berkshire sells a sizeable amount of its shares, KHC stock is likely to sink meaningfully.
The most attractive aspect of KHC stock is its high dividend yield, which is currently about 6.5%. But in the press release announcing the split, KHC did not 100% commit to maintaining the yield. “In aggregate, the current dividend level is expected to be maintained,” the firm stated.
CNBC noted that “health-conscious consumers” bought fewer of KHC's products, which tend to feature unhealthy items like processed cheeses, processed meats, and sizeable amounts of sugar, in the years following the merger. With 85% of consumers reportedly worrying about the healthiness of the food and beverage items that they buy, according to recent research, that issue may have intensified since the merger and certainly hasn't faded at all. Further, the year-over-year (YoY) decline of the firm's revenue in Q3 indicates that this issue may still be negatively impacting its growth.
And in a related development, KHC, at the urging of the U.S. government, announced in June that it would remove "Food, Drug & Cosmetic (FD&C) colors" from all of its products “before the end of 2027.” Although KHC stated that almost 90% of its products “by net sales” in America no longer have FD&C colors, it's possible that this change will have a material, negative impact on the company's financial results.
No Major Positive Catalysts
It's true that in recent years, some spun-off stocks, such as GE Vernova (GEV) and Solventum (SOLV), have performed extremely well. But the spun-off stocks that delivered great results for investors tended to have had extremely powerful positive catalysts.
Conversely, the only potential positive catalyst that I see for KHC is the increased focus and efficiency cited by the company following the merger. But that's not a very tangible catalyst, and even Buffett said he does not believe that the breakup will address the issues that KHC is facing. Others were also dubious about the efficacy of the transaction, with, for example, Yahoo Finance executive editor Brian Sozzi stating that “More marketing support isn't some form of elixir.”
On the date of publication, Larry Ramer did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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