 Good day fellow investors, is Kraft Heinz a bargain or a falling knife? We know that Kraft Heinz is one of Buffett's holdings and on this channel we talk so much about Buffett so it's okay that we talk also about his holdings. Now we have to see whether the stock is a bargain because it fell 40% from where it was just a year ago. When Buffett sees a stock price crash like that he's usually happy because he buys more but not so fast. We're going to discuss what happened to the stock, is it an opportunity or a trap? We're going to discuss the packaged food trends which are key to understand the business and what we can expect in the future, what we can expect on the business side of returns and we're going to discuss how to invest in Kraft Heinz. So on the stock, the stock was trading around 93 not even a year ago and now it rates at 57. This is an immense thing for a company like Kraft Heinz that was considered blue cheap defensive dividend yielder. Let's see what happened. The first issue with Kraft Heinz is growth. If Wall Street had to pick one thing over anything else that's growth, everlasting growth and unfortunately for Kraft Heinz it hasn't been the case there. If we look at revenues, apart from the acquisition in 2015 the merger revenue growth has been flat over the past 10 years. Earnings have been volatile but don't look at the current price earnings ratio of 7 as a bargain because it's due to one-off tax legislation change. The thing that has improved are margins thanks to 3G getting into the company and cutting, cutting, cutting, cutting costs everywhere in order to improve margins to make this company really a cash milking cow for Buffett and other holders. Kraft Heinz has seen organic declines in sales both in the US and in Canada and now the question is whether this will continue, reverse or stabilize. The lack of organic growth comes from a multitude of reasons. Shifting consumer preferences, less processed foods, better quality, packaged foods decline. Increased competition, declining sales in 9 of 12 product categories, difficulty in scaling their brands internationally and there is also the debt burden. What weights on the stock price is the following. Amazon Whole Foods competition, company missing revenue estimates I don't know over the last 19 quarters. Kraft Heinz stock price increased over the last 5 years just on expanding valuations and improving margins. Higher interest rates for a bond-like dividend payer and many downgrades. We have seen Goldman, Morgan and lately Credit Swiss. So is it an opportunity or a trap? Before digging into the growth or potential turnaround, let me touch on the debt and higher interest rates. Kraft Heinz's debt burden is 29 billion where the yearly interest expense was 1.2 billion giving an average interest rates of 4.1 billion for 2017. As interest rates increase, Kraft Heinz's debt adds up and a 1% increase in interest rates would add 300 million to Kraft Heinz's payments. Now 300 million is not that much but interest rates increasing, lower profits, you might see an expansion of those interest rates payments, which would lower the available money for the dividends which is 2.8 billion and dividend decline, a dividend cut would further put substantial pressure on the stock price. So higher interest rates are never a good thing for a dividend company and a dividend company that's paying a lot of money for the dividends and leaving little money for growth. They're really milking Kraft Heinz. So understand that when investing in the company. Now the goods thing is that rest of world sales are up 7% but those make just 12% of total sales and the EBITDI there is just 7.7%. Showing how margins aren't what Kraft Heinz is used to in the United States. So it will take some time for global sales to be significant and displace the US, therefore the US market is the key to watch when it comes to Kraft Heinz. Let's look at some food trends. I use the Price Waterhouse Coopers report on food trends. First, different eating habits. Consumer preferences are shifting and the biggest risk for Kraft Heinz is that the strongest brands that have been extremely strong in the past decades see their power slowly deteriorate due to new eating habits. Further, the key with such a consumer packaged foods is demographics. The more people there are the better are the sales. The demographics are not that positive and the natural birth rates in Europe and the US are below the replacement rate. Thus less people in addition to different eating habits. Three, fragmentation of the market. In the past decades, the developed markets had a quite homogeneous middle class living in the American dream, which included lots of packaged foods. However, according to PWC, we now have two groups survivalists that go to little Aldi and selectionists that go to Whole Foods and are willing to pay for premium products. Kraft Heinz is in the middle and therefore it suffers. Emerging markets are not easy for packaged good companies. If we look at China, there is staggering growth. We see that the markets are extremely fragmented with lots of local players and each region is different. So the mass media ads Kraft Heinz has been using in the past don't work anymore. Plus 15% of the purchases are done online in China, which increases the competition, the potential for margins, etc., etc. Very difficult that they can replicate what they have in the US in emerging markets and we have seen that on their margins. Further, brands, the marketing. You cannot use Michael Jordan as it has been the case in the past and sell a lot of packaged foods. Now you have to go through social medias, go differently and everybody has the same chance now. Even the local store, the local producer can get to attention and that's something that big brands, big beamons have to find a way around. They are losing territory, they are losing attention. Number six, higher costs. General Mills just shouted to the world that everything that they buy has been increasing in prices and they cannot transfer higher prices on customers, which will squeeze their margins. By about 5.6%. This was a month ago and we haven't yet seen Kraft Heinz say the same. As they are in similar industries, we could expect something like that. Thus, a cut to guidance, cut to the dividend perhaps, which would significantly negatively impact further the stock. Understand that, yes, Buffett owns it, but Buffett owns it with, okay, I'm milking it, I'm getting huge dividends, I'm reinvesting those dividends elsewhere. So he bought with a margin of safety. He bought where margins were low, knowing that 3G and Sergio Lehmann would increase those margins and he probably has a risk reward model on long-term cash flows from the purchase date. Now, if you pay what he paid or a little bit more, then you renounce on the dividends he already got and it's always different for Buffett and you. If there is a crisis, Buffett can lend them money, convertible shares, whatever, to keep his profits high or return on investment good, which are things you can't do. Nevertheless, the consensus earnings estimates forecasts are 3.83% from 2018, 28 cents higher than 2017, thanks to lower taxes. At the current price, this leads to a forward price earnings ratio of 15, implying a 6.6% earnings yield. The dividend yield of 4.43% is probably going to stay. So what would be the most likely scenario for Kraft Heinz? Let's see the negatives, declining sales, rising interest rates, rising input costs, declining markets, demographics, high competition and changing consumer preferences. The positives, cost-cutting strategies worked, but is there still more room for cost-cutting, growth in emerging markets, however, lower margins, strong brands and high dividend yield. Now, you have to see, okay, the current dividend yield is 4.3%. The treasury yield, the 10-year treasury is at 3%. With Kraft Heinz, we don't know how the company will look like 10 years ago because of the shift in the trends related to the food industry. So we don't know if you buy now, whether you will have a guaranteed principal return or those margins, those earnings will deteriorate over time due to competition and everything that's going on in the food industry. That's one. Second thing is you have to look at interest rates. If the treasury yield, let's say, hits 4% and investors demand a dividend yield of 6% from Kraft Heinz, this implies a stock price of 41 and lots of dividends will be needed to cover for the lost ground. God forbid the dividend cut, then you can see 40, 30 and even lower stock prices. So that's the risk. However, the upside could come, okay, that they managed to grow in Canada, not lose 7% of organic sales, which is a big, big hit. So that they managed to really expand into those markets, into India, they're focusing China. So you have to wait and to see, okay, the negatives and the positives. For me, simply the interest rate increase, the increased required dividend yield is the biggest risk there and too much of a risk. And I will look again at the company at 40 if it comes there. If you're a shareholder, I hope it never touches 40. I hope it just goes up, up and down. However, if we look from Buffett's perspective, he loves it when the shares go down, down, down and down because he can buy more and you can reinvest your dividend. So it's always an interesting investment strategies with these stocks and it depends also on the personal perspective. Are you a long-term investor that hopes to see lower prices, to buy more and reinvest the dividend or you're betting on a turnaround to see higher prices? Real investors hope to see lower prices so that can buy more and reinvest the dividend. Thank you for watching. Don't forget to check my book on Amazon. The link is in the description below. 25 tools, how to analyze intrinsic values, how to analyze stocks from a modern value investing perspective. Looking forward to the comments and I'll see you in the next video.