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Kraft Heinz Is Value Stock Picking With Unilever

- By Holmes Osborne, CFA

We wrote about Unilver NV (UN)(UL) and what a bargain the stock was back in November. At the time, the stock was $39.06. The stock recently popped to $48.41 (52-week high) after Kraft Heinz Co.'s (KHC) offer. That is a 23.9% return.

Unilever's revenue was $49.8 billion in 2013, $48.44 billion in 2014 and $53.27 billion in 2015. Earnings per share were $1.66, $1.79 and $1.72 over that same time frame. Operating margins are 14.29%. Free cash flow was $7.33 billion last year, and the free cash flow yield is 6.6%. That is a pretty reasonable price to yield. Much of the free cash flow is paid out as a dividend. Its debt is rated in the A range by the rating agencies.

The company has 2.84 billion shares, the American depository receipts traded for $39.06 and the market cap was $111 billion in November. The forward dividend was $1.42 and the dividend yield was 3.63%. Trailing 12-month earnings per share were $1.73 and the price-earnings (P/E) ratio was 22.57. Based on where large caps are trading, that is a pretty good deal.

Unilever rebuffed Kraft's offer. You cannot blame management. The Anglo-Dutch company has a long, rich heritage. The Dutch and British are not going to give up the crown jewels for just a couple of bucks a share.

Brazilian investor Jorge Paulo Lemann was behind the merger of Kraft and Heinz, Inbev and Anheuser and many other deals. Lemann is known as a cost-cutter and surely would have trimmed away at Unilver. Warren Buffett (Trades, Portfolio) is an investor in the Kraft-Heniz deal.

That is what value investing is. You find a stock and then compare it to the underlying company. It could be there are hidden assets like real estate that is worth more than it shows on the books, an industry could be out of favor or a new product will boost earnings. Then you wait for the markets to see what you see. Or, what you see works its way to the income statement and earnings per share. Then, this news shows and the market must respond.

It is also blue-chip investing. Blue-chip stocks, and that is exactly what Unilver is, usually do not fly under the radar for long. Unilever did for a few months and then popped up on a lot of folks' screens. Try to be in the next Unilever.

Disclosure: We do not own shares.

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This article first appeared on GuruFocus.