Why this Warren Buffett stock is surging

·Anchor, Editor-at-Large
·4 min read

Some praise by Warren Buffett's potential successor as CEO of Berkshire Hathaway has investors eating up shares of Kraft Heinz (KHC). 

Shares of the mac and cheese maker have surged to a 52-week high, according to Yahoo Finance Plus data. The stock is up a tasty 6% so far in May, outperforming the 2% drop for the S&P 500. 

The gain is even more impressive considering packaged food stocks have traded sideways of late, pressured by the one-two punch of inflation fears and concerns about demand as people's lives return to normal after getting vaccinated for COVID-19. For instance, shares of beverage giants Coca-Cola and PepsiCo are only up 1.5% in May. Spam maker Hormel's stock is up 1.1% this month, while frozen food king Conagra Brands' shares have gained 1.9%. 

As for Kraft Heinz, traders look to be feasting on several aspects of the investment thesis.

First, the Warren Buffett Effect. 

Berkshire Hathaway Vice Chairman Greg Abel said at the company's annual shareholder meeting on May 1 he feels "comfortable" with Kraft Heinz, voicing confidence in the leadership of CEO Miguel Patricio and his new management team. Abel —who was revealed as the likely successor to Buffett after the Berkshire Hathaway annual meeting — is on the Kraft Heinz board along with fellow Berkshire Hathaway executive Tim Kenesey.

Berkshire owns about 26% of Kraft Heinz.

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To be sure, this public comfort with the company is very new.

Kraft Heinz for years slashed investments in key brands in order to meet aggressive operating profit targets by backer 3G Capital since their 2015 merger. Top talent left the company.

One of the final black eyes came in February 2019, when Kraft Heinz took a $15.4 billion write-down on its natural cheese, Oscar Mayer cold cuts and Canadian retail businesses. Buffett himself then expressed displeasure in his investment at the 2019 Berkshire annual meeting held in March.

The new public show of support likely has investors thinking Buffett won't be dumping his stake in the company, which would deal a major blow to the stock price. 

Secondarily, the market appears to be viewing new management with a favorable eye.

Patricio took over as CEO in July 2019 and found a company in turmoil, hemorrhaging top talent and lacking in investment for well-known brands. The portfolio was also filled with underperforming brands given evolved consumer preferences.

CHICAGO, IL - MARCH 25: In this photo illustration, Kraft and Heinz products are shown on March 25, 2015 in Chicago, Illinois. Kraft Foods Group Inc. said it will merge with H.J. Heinz Co. to form the third largest food and beverage company in North America with revenue of about $28 billion.  (Photo by Scott Olson/Getty Images)
In this photo illustration, Kraft and Heinz products are shown on March 25, 2015 in Chicago, Illinois (Photo by Scott Olson/Getty Images)

The former Anheuser-Busch marketing wizard wasted no time in setting up a new management team. In September 2020, Patricio sold part of the company's cheese business for $3.2 billion to France's Groupe Lactalis. That sale was unveiled at the company's investor day, where it outlined a more focused set of product priorities. He promised to boost marketing by 30% in top brands while also cutting $2 billion in costs through 2024.

In mid-February, Patricio then unloaded the Planters nut business to Hormel for $3.35 billion.

"We are a very different company than we were a year ago," Patricio told Yahoo Finance Live soon after the Planters sale.

'Pulling on many of the right strings'

The efforts have begun to pay off just as Kraft Heinz has benefited from people eating more food at home amidst the COVID-19 pandemic. 

Kraft Heinz's first quarter sales rose 3.9% and adjusted operating profits gained 11.6%.

Sales increased in all of the company's business segments: U.S. (up 2.5%); international (up 7.2%); and Canada (up 8.8%). Adjusted operating profits improved year-over-year in all segments, led by a 57.4% increase in Canada.

The results quieted some concern on the Street that sales and profits at Kraft Heinz would slow sharply later this year amid inflationary pressures and less food-at-home consumption as the pandemic turns the corner. 

"In our view, the company is pulling on many of the right strings to drive international growth, and we believe the long-term EBITDA growth algorithm (2-3%) is achievable (and far lower than most in our coverage) — we continue to see upside," said JP Morgan analyst Ken Goldman in a research note to clients this month. 

The next catalyst to Kraft Heinz's stock price could be more analysts falling in line with Goldman's thinking, provided they want to make clients happy. 

Despite the several quarters of operational improvement under Patricio, out of the 20 sell-side analysts that cover Kraft Heinz 80% rate it a Hold or Sell. The average price target by analysts on Kraft Heinz is $42, below the stock's current trading level of $43. 

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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