If you look up the definition of the term value trap, it really wouldn't be a surprise to see The Kraft Heinz Company (NASDAQ:KHC) listed as a prime example. Jokes aside, there's no denying that the company's performance over the past few years has been pretty dismaldragged down by a mix of cultural issues, excessive cost-cutting, a lack of innovation, and, justto top it off, some messy accounting problems.
Despite having none other than Warren Buffett (Trades, Portfolio) (Trades, Portfolio) as its largest shareholder, even he has openly admitted it wasn't one of his best investments. Investor confidence has understandably eroded over time, as hopes of a meaningful turnaround have consistently fallen flatand the stock price has paid the price for it.
That said, while Buffett may regret the investment, he still hasn't let go of the bone. And maybe that's because, beneath all the surface-level disappointment, Kraft Heinz still ticks a lot of the boxes that matter for a classic value investor: it's cheap, and it continues to generate strong returns on tangible assets.
That's why I believe Kraft Heinz may finally be moving out of value trap territoryand that buying in at current levels could actually turn out to be a solid opportunity. In this article, I'll break down the company's recent journey, the steps it's taking to rebuild investor trust, and why it still holds real potential as a value stock worthy of Warren Buffett (Trades, Portfolio) (Trades, Portfolio)'s portfolio.
The Kraft Heinz Company: A Troubled Journey
Kraft Heinz stock has been a real mess over the last several years. The returns have been terrible. Since 2015, KHC has posted a negative annualized return (CAGR) of 9.47%.
Kraft Heinz: Beneath the Surface, Still a Compelling Value Pick
To understand what's been going wrong with this company, let's rewind to 10 years ago, when Kraft and Heinz merged. Back in 2015, a merger orchestrated by none other than Berkshire Hathaway and the Brazilian group 3G Capital brought together two companies with very different corporate cultures. Heinz was more of a family-oriented company, while Kraft had already been operating under 3G Capital's aggressive cost-cutting playbook.
Following the merger, a culture of frugality was implemented at Kraft Heinz, which initially led to better margins. But here's the catch: this approach came at the expense of a key element in the consumer packaged goods industryinnovation and brand investment. Over time, these areas were left in the dust.
As shown in the chart below, capital expenditures (CapEx) as a percentage of revenue were cut in half between 2016 and 2020, during the peak of the COVID-19 pandemic. Only in the past five years has the company gradually ramped up CapEx again, returning to levels seen nearly a decade ago.
Kraft Heinz: Beneath the Surface, Still a Compelling Value Pick
Source: Author's, Company's filings.
This stubborn focus on cost-cutting meant that Kraft Heinz was stuck with a portfolio of stagnant brands like Velveeta, Jell-O, and Oscar Mayer, leading to equally stagnant results for both the top and bottom lines.
To put it simply, over the last seven years (since Kraft Heinz shares hit their all-time highs), sales have declined by 2.5%, EBITDA has shrunk by 62%, and net income has plummeted by 75%. Volumes have also dropped significantly. In other words, it's been a total disaster.
Kraft Heinz: Beneath the Surface, Still a Compelling Value Pick
If things couldn't get worse, 2019 was marked by a massive scandal involving Kraft Heinz's accounting practices. The company admitted that some of its iconic brands weren't worth what it paid for them. The result was a massive $15.4 billion goodwill write-down and severe reputational damage. Investor confidence took a huge hit, and Kraft Heinz was even forced to slash its dividend by 36%, one of the main reasons investors had bought into the company in the first place. Warren Buffett (Trades, Portfolio) (Trades, Portfolio) himself even commented that he had overpaid for Kraft Heinz after the 2019 scandal.
The Turnaround Playbook for Kraft Heinz
After the storm of 2019, the pandemic hitand with it came an opportunity for Kraft Heinz to reset. But despite some signs of progress, the company's performance has stayed mostly mediocre. While its business has stabilized somewhat in recent years, turning around organic growth is no easy task. It takes time, and even then, execution has to be nearly perfect.
Take the last five years, for example. Kraft Heinz has basically delivered flat results: revenues have grown at a meager 0.7% CAGR, while EBITDA and operating income have declined by just 0.3% and 0.5%, respectively.
Kraft Heinz: Beneath the Surface, Still a Compelling Value Pick
Source: GuruFocus
Now, it's important to factor in that cumulative inflation in the U.S. over that period has been somewhere between 20% and 25%. So, while Kraft Heinz's revenues may look flat in nominal terms (i.e., without adjusting for inflation), the reality is that its top line has declined in real terms. That suggests not just a loss of pricing powerbut also a decline in volume.
In full-year 2024, the numbers were particularly underwhelming. Sales in North Americawhich account for almost 75% of total revenuefell by 3.9%, with volume mix dropping an even steeper 4.5 percentage points.
Still, the company hasn't just been standing still. Kraft Heinz has been actively working to reshape its business. Between 2020 and 2022, it sold off parts of its cheese and nuts businesses for more than $6.75 billion.
That helped in several ways: it allowed the company to pay down debt, boost cash flow, and reinvest in innovation. One standout? Its customizable ketchup-mixing dispenser, which has gained industry recognition. And in 2024, Kraft Heinz rolled out plant-based versions of its classic mac and cheese and Oscar Mayer hot dogsa smart move, given that the U.S. plant-based market is expected to grow by about 115% between 2023 and 2030.
Looking ahead, the company has set its sights on expanding in Emerging Markets, where its current market share is still quite small. Management has signaled that it won't hold back on innovation-focused investments. Since 2020, CapEx has nearly doubledfrom $596 million to $1.02 billion in 2024.
Of course, if Kraft Heinz fails to convince investors of a real turnaround in its core business, it still seems committed to rewarding shareholders in other ways. Since the 2019 dividend cutfrom $0.63 to $0.40 per quarterthe company has at least kept its dividend stable. There haven't been any hikes since then, but with the stock price down, that payout now represents a 5.44% dividend yield, far above the consumer defensive sector average of 2.4%. Kraft Heinz has also bought back roughly $2 billion worth of stock over the past four yearsnearly half of that in 2024 alone, with $988 million in repurchases.
Kraft Heinz: Beneath the Surface, Still a Compelling Value Pick
Lastly, it's worth noting that 3G Capital fully exited its position in 2023, leaving Berkshire Hathaway as the company's largest shareholder, with a 27.25% stake. Berkshire also has two representatives on Kraft Heinz's board: Timothy Kenesey and Alicia Knapp.
Additionally, it's worth noting that aside from Buffett, the Southeastern Asset Management fundrun by billionaire Mason Hawkins (Trades, Portfolio)disclosed a new 4.5% position in Kraft Heinz at the end of last year, making it one of the fund's top ten stock picks. While no further details were provided about the transaction, based on the fund's value investing philosophy, this is yet another renowned investor who sees Kraft Heinz as a value picknot a value trap.
Kraft Heinz's Case for Long-Term Value
While most of what we've covered so far might sound bearishand with investors still hesitant to bet on Kraft Heinz's turnaroundthere are a few key metrics that continue to make the company attractive to value investors.
As Buffett himself has noted, one of the reasons he likes Kraft Heinz is that its consumer packaged goods business generates strong returns on tangible net assetsa crucial trait in companies that don't need to pour massive amounts into physical reinvestments to keep the business running or growing, even if that growth is modest.
To dig deeper into this point, let's take a look at Kraft Heinz's ability to generate returns on its invested capital over the last few years. One of the best metrics for this is Return on Investment (ROI), calculated as operating profit (EBIT) divided by the sum of net fixed assets (PP&E) and changes in working capital.
This metric is especially relevant for a company like Kraft Heinz, because it focuses on the return generated by the operating capital actually deployed in the businessleaving out accounting intangibles and financial noise that might otherwise distort the picture. And while Kraft Heinz gets much of its value from its strong brandswhich don't need heavy reinvestment to stay relevantit's also not an asset-light business. The company still runs large-scale factories, distribution centers, and holds substantial inventory.
Looking at the numbers, Kraft Heinz reported an ROI of 66.7% in 2024. That means for every dollar invested in its operating assets, the company generated 67 cents in return. Pretty impressive.
But even more interesting is the longer-term view: over the past nine years, average ROI has clocked in at 81.5%. That's a rare level of consistencyespecially in a mature, traditional industry. Kraft Heinz has reported ROI above 50% in almost every year, which is no small feat.
That said, it's worth pointing out that in some yearslike 2019 and 2021the company reported negative working capital. This can artificially reduce the denominator in the ROI calculation (i.e., invested capital), which in turn inflatesthe ROI. So, while the results are strong, it's important to take those anomalies into account when interpreting the headline percentages.
Kraft Heinz: Beneath the Surface, Still a Compelling Value Pick
Source: Company's filings, author
Relatively Safe, Clearly Cheap
The second and final reason why Kraft Heinz still looks appealingas a Warren Buffett (Trades, Portfolio) (Trades, Portfolio)-style value pickis simple: it's a good business trading at a cheap price.
On one hand, Kraft Heinz has clearly shown its ability to generate solid earnings and high returns on capital. On the other, the company trades at what many would consider a de-risked valuation. If we take the $5.51 billion in EBIT the company generated in 2024 and divide it by the current enterprise value of $52.92 billion, we get an earnings yield of 10.4%.
In plain terms, this means KHC could theoretically return over 10% annually on the total capital invested in it (debt + equity), assuming earnings remain steady. That's a high hurdleespecially for a mature, stable business like Kraft Heinz. It suggests the market might be undervaluing the company. Of course, it could also imply that investors are pricing in some level of risk.
That said, if we consider Kraft Heinz's weighted average cost of capital (WACC) is likely in the 78% range, then the company is comfortably earning returns above its cost of capitala classic green flag for value investors. And it gets even better when you compare that to the U.S. 10-year Treasury yield, which sits around 4.24.5% as of early 2025. A 10% earnings yield is more than double the risk-free rate, which gives you a pretty compelling spread.
To give a sense of the margin of safety baked into the current stock price, let's walk through a quick valuation. Even using conservative assumptionslike a muted 1.6% revenue CAGR over the next five years (per Wall Street estimates), EBIT margins staying flat at 21.4%, a WACC of 7.5%, and a long-term growth rate of just 2.5%you'd still get to an equity value of around $52.7 billion.
This model also assumes a 21% effective tax rate, D&A at 68% of CapEx, CapEx at 4% of revenue, and working capital changes at -2% of revenue. With 1.19 billion shares outstanding, that implies a fair value of roughly $44 per share.
Kraft Heinz: Beneath the Surface, Still a Compelling Value Pick
Source: Author, model by Wall Street Prep
Sure, this is just a theoretical exercise, and every valuation comes with caveats. But these inputs are relatively conservativeand they still point to a solid margin of safety at current prices. In other words, for long-term investors willing to look past the noise, Kraft Heinz might still offer value that the market is overlooking.
The Bottom Line
Kraft Heinz stock has been a disasterand it's still struggling to win back investors' trust after nearly a decade of underperformance. Of course, turning around an ocean liner like this isn't easy. Given its low-growth profile and the nature of its industry, I highly doubt Kraft Heinz will ever return to its all-time high of nearly $97 per share.
That said, I do believe it has the potential to climb back to at least half that level. Even with all the valid skepticism surrounding the investment case, at today's pricesand with its proven ability to generate strong returns on capitalKHC still stands out as a solid value play in theory.
Whether it actually plays out that way in practice? Well, that remains to be seen. But the setup is definitely interesting for anyone with a long-term, value-oriented lens.
