Why Kraft Heinz Debut May Signal More Strength Ahead

The Kraft Heinz Co. (NASDAQ: KHC) opened its first day of trading Monday at $71 a share and rose as high as $74.29 in the first hour of trading. Volume totaled around 950,000 shares after the first 90 minutes or so of trading.

The signs are that the stock can go much higher. Credit Suisse’s analyst initiated coverage with an Outperform rating and a price target of $85 a share. Stifel has rated the stock a Buy with a price target of $80. Last week Fitch Ratings boosted its long-term issuer default rating on the company that is now Kraft Heinz from BB- to BBB-. The rating covered both old Kraft and old Heinz debt, now rolled into a single rating.

Warren Buffett’s Berkshire Hathaway Inc. (NYSE: BRK-A) and 3G Capital owned Heinz before the merger, having paid $11 billion for the company in 2011. Berkshire Hathaway now owns a stake of roughly 26% in the new company, and that is worth about $24 billion, according to Bloomberg News. It is Buffet’s second largest holding, behind only his $26 billion investment in Wells Fargo.

Former Kraft shareholders own 49% of the new company and former Heinz shareholders own 51%. Kraft shareholders also received a special dividend of $16.50 in cash plus one share of the new company for each share of Kraft stock they owned. The aggregate amount of the special dividend is approximately $10 billion and was funded by 3G Capital and Berkshire Hathaway.

It will take a while for Kraft Heinz to find its value, but as Credit Suisse noted, 3G Capital is known for wringing out costs primarily by lowering headcount. As the new CEO (from 3G Capital) starts work, and six of 11 board seats belonging to Berkshire and 3G Capital are enough to pursue a proven approach to cost-cutting, shares of Kraft Heinz could be in for some solid growth over the second half of this year.

Shares traded at $73.60 in mid-morning action Monday.

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