February 15, 2008

Buffett buy into Kraft

Buffett disclosed a a large stake in Kraft by buying just under 10% of the company. Off course Buffett has established a smaller stake last year in the cheese maker and increased it in the last quarter.

I have reviewed Kraft, see here, before and reached to a conclusion that although it has a lot of brand names and good cash flows I did not feel it was an appealing investment. The brand names does not translate to any competitive advantages nor does Kraft can sustain market share in the face of accelerating food prices.

I always wondered what is the value and how Buffett analyzed this one but to no avail. I guess that is why he is the second richest man in the world and I am not. Does this mean I will change my mind on the kraft? No. I will stay away from it, I do not like the food business, the aging brands, the high debt level, if you strip intangibles, and the high valuation. But I will be curious to his reasoning.


MG said...

Maybe he just likes Kraft Dinner, similar to how he likes Coke.

augustabound said...

Your post is partially a narrative into Buffett's strategy.
"I do not like the food business"
Is a simple, understandable business within his circle of competence.

"the aging brands"
The brands(aging or not) are mainstream that people trust when they go into a grocery store, tried and true, another Buffett trait.

"the high debt level"
I think a lot of that is from the pre spin-off days with Altria.

"But I will be curious to his reasoning."
Wouldn't we all. lol People wondered why he bought Petrochina, they found out after he made something like 9 times his investment then it was clear.
Now Kraft won't get that type of return, but I've heard that Buffett's target it 15% CAGR. He obviously sees some value, that's why he's Warren Buffett and I'm not.

Sami said...

augustabound all your points are valid. the company generates good free cash flows and has the brands and it is easy to predict in the future, people will still eat. but where it breaks down to me is why will a consumer still buy their products? the brand argument works but to an extent. also valuation is at par it does not sell at a discount, unless I made an error which is likely. But then again he said it better to buy a good business at a fair price than a fair business at a good price.

MG, yup maybe that's it and I do not like KD so it makes me not to like the business.