Obscure Berkshire Hathaway Filing Reveals What Warren Buffett Thinks About Kraft Heinz

Berkshire’s investment in Kraft Heinz has not gone smoothly. After taking Heinz private together with private equity investor 3G in 2013, Berkshire invested additional funds in the takeover of Kraft Foods in 2015, and was ready to finance a quickly-withdrawn $143 billion offer for Unilever.

Things have gone south for KHC recently. The company’s stock price and valuation have shrunk considerably over the last two years versus that of its peers. We can see KHC’s EV/NTM EBITDA multiple (in thick red below) starting at the top of its peer group two years ago, but recently declining to very the bottom compared with other US food companies (interactive chart link). We do expect the multiple to move up somewhat over the next few days as analysts adjust their estimates after the call.

 

KHC also had to delay its financial reporting this year due to certain actions by former employeesthat led to small restatements, and more notably, the company took a $15 billion write-down of brand values and cut its dividend in February of this year. In the most recent call on August 8, 2019, the company, now with a new CEO from AB In-Bev, did not provide guidance, took additional impairments, and warned of future impairments.

The travails at KHC are a topic of increasing concern to Berkshire Hathaway investors. The number of mentions of Kraft on the most recent shareholder meeting more than tripled versus last year to 27, up from just 8 in 2018.

Buffett himself did admit that Berkshire overpaid for Kraft but still thinks KHC is a “wonderful business.”

 

While getting color from the transcripts is nice, we were also interested in what is actually in the Berkshire filings, so we redlined the second quarter 10-Q filed with the SEC on August 5, 2019 against the Q1 version of the document. We saw a lot of new language around KHC.

What we’re seeing is a lower fair value of the investment (easily observable, since KHC is publicly traded). The carrying value was reduced because of the KHC financials’ restatement. We also see some puts and takes around the KHC YTD filings.

Most interesting to us was the inserted paragraph at the bottom; Berkshire reviewed KHC for impairments, and as of June 30, 2019, decided against it.

 

But Why?

The answer comes in a more obscure SEC filing, called CORRESP for Correspondence. CORRESP and UPLOAD are two forms of formal communication between the Commission and the filers. When a letter is directed from the SEC, it appears in filings as UPLOAD, and when the filer responds to the regulator, it is a CORRESP. 

Berkshire filed two UPLOAD and two CORRESP forms on July 24, 2019, though the exchange between the company and the regulator had taken place in May and June. 

The SEC was interested in how Berkshire was accounting for Kraft Heinz in the Q1 2019 10-Q filing. 

 

And here is how Berkshire responded in great detail to the SEC: KHC’s stock price decline and the length of this decline was not substantial enough. Also, the operating results, while currently poor, will be better (divestitures, brand power, reduced but not eliminated dividend)

 

On the following page, we see more information related to how Berkshire thinks about KHC: there are no plans to sell the stock at any time, and the KHC restatements are immaterial. 

 

Given Berkshire’s long involvement with Heinz, and then with Kraft Heinz, including Board of Directors representation, and its continuous investments in the space, we view these disclosures as material: Warren Buffett still thinks KHC is a long-term holding position that will recover.

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What We Learned From Redlining Beyond Meat’s (Nasdaq: BYND) Secondary Offering Documents

Meat alternative marketer and recent IPO Beyond Meat (Nasdaq: BYND) reported quarterly earnings a few days ago, and, concurrently, the company surprised the market with a secondary offering well ahead of the indicated 180-day IPO period (a rare occurrence in the last 10 years). The stock’s performance since its IPO has been stunning: the IPO priced at $25 on May 01, 2019, and the stock went up over 8 times leading up to the earnings announcement.

The secondary offering priced at $160, well below the closing price of $222.13, the last price before the Q2 results and secondary announcement on July 29, 2019.

The offering was mostly pre-IPO investors and insiders selling (3,000,000 shares), along with the company selling 250,000 shares itself to fund its operations:

The secondary came just as BYND’s market capitalization surpassed that of a number of consumer staples companies in the S&P 500:

(interactive chart link)

We were curious to read the secondary offering document using redlining, to see what has changed since the IPO documents. Keep in mind that there will be changes solely due to the fact that BYND is now publicly traded, versus the pre-IPO language. We redlined the secondary S-1/A filed on July 31, 2019, against the final IPO S-1/A from April 29, 2019.

 

Here are our notes:

1) Stunning distribution and sales growth, along with successful partnerships and major increases in media impressions:

 

2) Expanding distribution in Europe and growing product lines:

 

 

3) Since the company is now publicly traded, there is a new warning around stock price volatility and potential losses:

 

4) Certain US states have introduced legislature regarding what products can be called “meat.” We saw this reflected in the added “state regulators” to this risk factor:

 

5) The rapid distribution growth noted above has resulted in some shifts in the major distribution partners:

 

6) There are no written contracts with the US co-manufacturers (note the EU deal mentioned above):

 

7) Big drop in local unemployment in the area around their Columbia, MO, facility warranted an update in this risk factor:

 

8) Entirely new risk factors: the growth will not last forever, and there might be serious fluctuations in the results:

 

9) Negative development for BYND in a lawsuit brought against them by a former co-manufacturer:

 

 

10) A relatively new development in IPO filings is the disclosure of use of Professional Employer Organizations for a number of HR/payroll tasks:

 

11) Surprisingly, the number of pending patent applications have dropped:

 

12) Added language around compliance and internal controls:

 

 

13) As we saw in the price action after the secondary offering was announced, the share price can fall. There is added language around secondary offerings’ effects:

 

14) Since the stock is now publicly traded, there is a whole new paragraph on the effect of research analyst coverage:

 

15) We can see the company balance sheet pro-forma of the offering. Note the increase in Cash and Cash equivalents, along with the increase in Additional paid-in capital:

 

16) New language on revenue seasonality (“summer grilling season”):

 

17) The IPO also lead to a simplification of the capital structure of the business (also note the Warrant crossed off in the table above):

 

18) The company has a small balance on its revolving line of credit:

 

19) New obligations: a 5-year office lease and minimum purchase commitments:

 

20) There is a lot of detail on Sales and Marketing activity (of course, all numbers are up: sales team, promotional events, samples, followers):

 

21) Notably, no changes in the serious celebrity endorser line-up:

 

22) New executive hire and one anticipated Board of Directors departure:

 

23) There is quite a bit of detail around the lock-up agreement (which was waived for this offering)

 

24) The underwriters have the standard “greenshoe” option to sell additional shares: 

Get in touch with Sentieo to try your own redlining!

 

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Doing Better Analysis with Non-Financial Data Sets in Sentieo Plotter

Sentieo’s main data visualization tool, Plotter, contains a veritable treasure trove of data series. While some financial and valuation data sets are commonly available, Sentieo Plotter stands out with its numerous non-financial data sets that are available within Sentieo, or created by you. (For example, you may have pulled Document Search statistics or data generated from Table Explorer, our ML-driven SEC filings table chaining tool).

Sentieo users can also upload their own data sets. Your individual data series and full charts can be saved for future use. Your charts can then also be added to longer notes or a formatted thesis. They can also be shared with your team or publicly to non-Sentieo viewers.

Below, we’ll go over a few of the non-financial data sets that can help you do better analysis.

 

FRED Macro

We recently integrated around 1,000 of the most popular data series from the data site maintained by the Federal Reserve Bank of St. Louis. 

An analyst needs to understand the macro currents that affect the companies and sectors under her coverage. For example, below we plotted the Civilian Unemployment Rate from FRED vs. a simple average rolling NTM P/E of four staffing companies. We can immediately see that the sector valuation is very closely tied to the unemployment rate. 

Interactive chart link

 

Online Activity Data and the Sentieo Index

Sentieo Plotter pulls Twitter mentions, Alexa website traffic, Google Search trends, and Instagram mentions. Through our Mosaic module, we also run a multivariate regression on these data sets against Wall Street estimates for revenue growth and KPIs. This Sentieo Index is also available inside Plotter, ready to be displayed alongside other data sets. 

For example, here is what one-month moving average page views, search trends, and Twitter mentions of the recent IPO Fiverr look like. Plotter lets you customize your data set display options, including moving averages (for smoothing) or YoY change metrics. 

Interactive chart link

 

Document Search Statistics

Part of your own IP is your ability to see trends: but how can you quantify trends with non-financial data sets? One way is to generate your own document search statistics to see if documents with key term mentions are going up or down. For example, below we searched all restaurant transcripts for mentions of “delivery.” We can see a clear increase in document mentions starting in 2017.  

Interactive chart link

 

Company-Specific KPIs

In some cases, investors and industry analysts give more weight on KPIs and KPI trends. Sentieo Plotter has company-specific KPIs that can help users “paint a picture” of the underlying business trends. 

In this example, we have pulled KPIs (comparable store sales) for five casual dining stocks, and have done an unweighted average for our “custom index” to see what is going on in this segment of the industry. 

Interactive chart link

 

Custom KPIs

Not all KPIs that an analyst might find relevant are available through legacy standardized data providers, but are disclosed in company filings. Sentieo’s Plotter is integrated with Sentieo’s machine learning-based Table Explorer tool, which identifies and chains past tables in SEC filings. 

For example, here we are pulling Royal Caribbean Cruises’ APCD (Available Passenger Cruise Days) in a few clicks into Plotter.

Interactive chart link

 

Linguistic Sentiment

Sentieo uses NLP (Natural Language Processing) for analyzing quarterly transcripts (management and analyst sentiment + spread between the two, along with keyword surfacing for both groups). These sentiment metrics can also be pulled into Plotter. For example, here we are looking at Tesla’s management sentiment reaching a high point when reported sales growth reached its highest point (summer of 2018, when the company started filling its backlog). 

Interactive chart link 

 

Your own data sets

Sentieo Plotter enhances your workflow, efficiency and visualization capabilities with two other very useful functions: uploading your own data in CSV format and giving you the ability to save generated data sets for quick recall in other Plotters so that you can re-use your IP. 

What we have seen is that some Sentieo clients upload their own proprietary data to combine with and visualize against what Plotter already has. Other clients like using publicly available but obscure data sets, such as very niche US Census data or BLS statistics. 

Sentieo can do a lot more than just data visualization. Please get in touch to request a demo

 

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