• The last 12 months were disastrous for the company and investors.
• The management led by the new CEO has implemented several strategic initiatives to revive earnings growth.
• Shares seem to be undervalued even if things continue to go south in the next few years despite these efforts.
• The above-5% dividend yield provides sufficient compensation for waiting until shares converge with its intrinsic value.

Source

It's not always that Warren Buffett admits to a mistake. That's not because he feels embarrassed to admit to one, but because he simply doesn't make many. In February 2019, on CNBC, the 'Oracle of Omaha' had this to say about Berkshire's stake in The Kraft Heinz Company (KHC).

I was wrong in a couple of ways on Kraft Heinz. We overpaid for Kraft.

Needless to say, this remark, along with the dividend cut, deteriorating profitability, the accounting scandal, and executives leaving the company, led to a secular decline in the share price over the last 12 months.

Data by YCharts

There's no way that investors can time markets accurately, but paying the right price is important to unlock attractive returns from an investment. This is where the concept of margin of safety comes into play, and at the current market price, there seems to be plenty of that.

Trading below Buffett's investment price, Kraft Heinz shares are significantly undervalued and several catalysts will help the share price converge with its intrinsic value estimate. The dividend yield of over 5%, in my opinion, is sufficient compensation for holding Kraft shares until the catalysts materialize and drive the share price higher.

The story behind the lackluster performance

Not one, but many factors contributed to the catastrophe last year. First, Kraft Heinz could not put an end to the disappointing financial performance and the silver line that many investors searched for did not come in the last few quarters. The company, apparently, became a victim of the changing dietary habits around the world, including the secular growth in the popularity of living a healthier life. Processed food items are quickly falling out of fashion and an increasing number of consumers now prefer healthy choices. Kraft Heinz has become a victim of this movement.

Source: Company filings

The company, in February 2019, announced a dividend cut as well. Understandably, the decision did not bode well with investors and shares got punished for taking a bold decision to free up some cash to improve the financial health of the company.

When it seemed the company had gone past its worst, the Securities and Exchange Commission initiated a probe into the accounting practices of Kraft Heinz, which eventually led to the management admitting to filing erroneous financial statements and confirming that reports pertaining to nearly 3 years would be reinstated to omit these errors. There was only one way the stock could have gone with these negative developments.

To make matters even worse, then CEO Bernardo Hees decided to step down from the company on June 30. Investors reacted negatively to this news as well, in fear of the company not being able to headhunt for a skilled executive.

The last 12 months could not have been any worse for the company and the performance of its shares in the market truly reflects the multiple headwinds that emerged during the course of this period.

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