- KPB & Co Research
Traditionally, value-based investors such as Warren Buffet and 3G Capital invest in such companies as Kraft-Heinz (NASDAQ: KHC) because they have solid brands, brands that they thought would be durable for decades to come. Unfortunately, in the world of millennials brands are not as important. Many of these "Big Brands" are facing stiff competition from small scale, community-based rivals who are seen as more authentic and healthier. Kraft Heinz, which comprises of a myriad of quality brands has seen its stock decline to US$57 coming from US$90 per share, and Warren Buffet stepped down from the board for reasons not clear.
See interview below at time 9:40 where Jorge Paulo Lemann board member of 3G capital explains some of the problem that old consumer packaged goods companies are going through:
Jorge Paulo Lemann on Disruption in the Consumer Packaged Goods Industry
With each passing day, GenXers edge closer to retirement, baby boomers prepare to go heaven, and millennials disrupt. The fact of the matter is that millennials overtime will be a significant part of the active workforce, and so will take a greater share of the target market of most businesses. Kraft-Heinz is trying to fix this problem by investing more in new brand extensions that can compete with the value propositions of the smaller community-based companies. This investment is very risky as there are high fixed costs in the business primarily from the interest cost associated with its huge debt pile. The money spent in marketing and product design have already lead to the company's net income declining by 14% in the six months ending in June, relative to the same period last year.
In our opinion, the company will face a difficult time in solving these issues as there is limited time and flexibility. The company's massive debt load provides little wiggle room, and the amount of free cashflow available to re-invest in the business is dwindling as the growth in sales slow. From the perspective of an investor, though the company has fairly good margins and good products, the valuation seems a bit stretched given the risks that are on the horizon, and the cashflows that the business's various assets are providing. The company also has a massive third party trade receivables program, where they receive in excess of US$2Bn in investing cash flows yearly under highly questionable circumstances.