Kraft Beats, Plans to Split (revised) - Analyst Blog
August 09 2011 - 8:02AM
Zacks
Kraft Foods Inc. (KFT) posted second quarter 2011
operating EPS of $0.62 a share, ahead of the Zacks Consensus
Estimate of $0.58.
Management credited the benefits of increased investments in
marketing and innovation, and focus on End-to-End Cost Management
for strong results in the quarter.
Revenues and Margins
Revenues in the quarter soared 13.3% to $13.9 billion, while
organic growth was 7.1% driven by strong top line growth in all
regions. Pricing accounted for 5.5 percentage points of growth and
volume and mix contributed 1.6 percentage points. However, Easter
related shipments partially offset the growth by 1.5 percentage
points.
Revenue grew in each of the geographies with the Europe Markets
leading the race with an increase in revenue of 26.2%. It was
followed by an increase of 22.3% in Developing Markets and 2.5% in
North America.
Operating income grew 4.4 percent to $1.9 billion reflecting
favorable currency, volume/mix gains and lower overheads.
Operating Income margin declined 120 basis points from the prior
year quarter to 14.0%, essentially due to the negative impact of
pricing on the margin calculation.
As on June 30, 2011, Kraft Foods had $2.3 million of cash and cash
equivalents compared with $2.8 million at the prior year
quarter.
Splitting Up
Kraft has announced that it plans to spin off its North American
grocery business to its shareholders and split into two independent
public companies: a high-growth global snacks business with
estimated revenue of approximately $32 billion and a high-margin
North American grocery business with estimated revenue of
approximately $16 billion.
Global snacks will consist of the current Kraft Foods Europe and
Developing Markets units as well as the North American snacks and
confectionery businesses. The North American grocery business would
consist of the current U.S. Beverages, Cheese, Convenient Meals and
Grocery segments and the non-snack categories in Canada and Food
Service.
The Way Forward
Kraft is stated to drive confidence from the belief of continuing
strong business momentum in the challenging environment of weak
consumer and category growth as well as significant input cost
inflation.
The confidence is thus reflected in its 2011 outlook and the
company expects to have an organic net revenue growth of at least
5%. Management expects the operating EPS to be at least $2.25.
Conclusion
We are encouraged by the company’s recently strengthened business
model through investments in quality upgrades, promotions and
marketing as well as initiatives taken to improve margin and
productivity by reducing manufacturing and overhead costs and
enhancing operational efficiencies by modernizing plants and
information systems.
However, higher commodity costs, increased marketing expenses,
competition from private labels and presence of tough competitors
like
Unilever Plc. (UL) and
ConAgra Foods
Inc. (CAG) concern us.
Currently, we prefer to rate the stock as Neutral. Further, Kraft
Foods holds the Zacks #3 Rank, which translates into a short-term
Hold rating.
(We are reissuing this article to correct a mistake: the
original post had erroneaously referred to the quarterly report as
a negative surprise by taking Q2 EPS at $0.55 instead of $0.62. The
original article, issued August 4, 2011, should no longer be relied
upon.)
CONAGRA FOODS (CAG): Free Stock Analysis Report
KRAFT FOODS INC (KFT): Free Stock Analysis Report
UNILEVER PLC (UL): Free Stock Analysis Report
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