Kraft Heinz's Intangible Assets Might Not Be As Valuable As Presented

Andrew Sather profile picture
Andrew Sather
1.62K Followers

Summary

  • KHC is up 23.56% since the latest merger.
  • Shareholder's equity has shot up with each of the last 2 mergers, dropping the P/B ratio.
  • Almost all of the shareholder's equity growth can be attributed to intangible assets.
  • The recent EPS picture has been stagnant.

Warren Buffett showed great confidence with his big purchase of Heinz (NASDAQ:KHC) a few years ago. While the recent mergers have made the stock's balance sheet appear very strong, I argue that the earnings picture combined with favorable accounting have weakened the actual investment thesis.

The Kraft Heinz Company is a typical Buffett-type stock. The company thrives on their strong brand names, which give that wide competitive moat that Buffett loves to refer to. Having just been renamed in 2015 after previously being called H.J. Heinz Holding, the stock has done really well in such a short time. The stock is up 23.56% since the rename and boasts a few other strong financial metrics.

KHC Chart

KHC data by YCharts

You can see the sudden drop in P/B in 2015. This signals a sharp rise in shareholder's equity, most likely coming from an increase in assets rather than decrease in debt when you consider the merger between Kraft and Heinz. Looking at the old 2014 H.J. Heinz annual report, the company was once called H.J. Heinz Company and was acquired by parent company H.J. Heinz Holding Corporation in 2013. Needless to say, the financial statements are a mess and balance sheet figures have been revised with each merger. So, the FY 2013 balance sheet had Heinz at $12.9 billion in total assets. Post merger (which they refer to on the 10-k as "successor" ending December 2013) the total assets were increased to $38.9 billion. I bring this point up because it explains the P/B jump in the above chart. In the March 2016 10-k report of the now currently KHC, the balance sheet showed December 2014's total assets as $36.5 billion and January 2016's total assets as all the way up to $122.9 billion. It's that jump from the 2014 year of financial results and the 2015 year that accounts for the P/B drop from over 16 to below 2.

This article was written by

Andrew Sather profile picture
1.62K Followers
I dive deep into SEC documents. Also provide essential stock market metrics and other resources to help individual investors build their circle of competence.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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