Kraft Heinz

By: Matt Garrott

This Commentary Brought to You in Part by Macaroni and Cheese

The latest earnings report for Kraft Heinz was a shocker.  Operating results were flat, there was a huge impairment ($15.4 billion) of goodwill, and the dividend was cut by 40%.  On top of it all, the SEC is investigating accounting irregularities.  The most surprising piece of the story is that Warren Buffett’s Berkshire Hathaway owns a big (26.7%) chunk of Kraft Heinz.  This sort of thing isn’t supposed to happen under Uncle Warren’s watchful eye.  What happened?

“It ain’t what you don’t know that gets you in trouble.  It’s what you know for sure that just ain’t so.”

Mark Twain’s famous quote may provide all the explanation needed.  America’s taste for processed cheese and ketchup just isn’t what it used to be, but investors didn’t catch on (revenues had even been flat for a couple of years).  Beyond the numbers, this is also a marking to market of the Kraft Heinz brand.  For a deeper dive, I suggest Aswath Damodaran’s write-up.  He’s a professor of finance at NYU and has a great way of unwrapping stories like this.

The takeaway for us is to be cautious when all the noise in financial entertainment comes from one direction.  There was much praise around Berkshire’s Kraft Heinz investment, likely leading to unwarranted optimism.  On the opposite end of the spectrum was December 24th, 2018.  The news readers on CNBC were calling the minute to minute drops in the market like a horse race, seemingly rooting for the largest drop possible.  This was going to be the end of the bull market, especially with a government shutdown looming.  In that moment, a bear market loomed large and recession seemed imminent.

The bear didn’t show up, though.  The S&P 500 dropped 19.4%, just shy of bear territory, before rallying 18.9% through the end of February.  At some point in the future, we’ll see both a bear market and a recession, but so far it just ain’t so.

We won’t tell you not to watch the news (we’ve usually got CNBC on the TV in the kitchen at Fairway), just remember that their time horizon is measured in commercial breaks while yours is measured in decades.

Fairway Scorecard 2-28-2019