Kraft Beats, Ups Outlook - Analyst Blog
November 03 2011 - 5:30AM
Zacks
Kraft Foods Inc. (KFT) posted third quarter
2011 operating EPS of 58 cents per share, surpassing the Zacks
Consensus Estimate of 56 cents by 3.6%. It also went up 23.4% from
47 cents reported in the prior-year quarter.
Management credited the benefits of increased investments in
marketing and innovation, effective advertising and focus on
End-to-End Cost Management for strong results in the quarter.
Operating gains, favorable foreign currency and discrete tax items
also contributed to the profit.
Including the Integration Program costs of 6 cents per share,
reported earnings were 52 cents per share in the current quarter.
The prior-year quarter includes the Integration Program costs of 5
cents and acquisition-related benefits of 1 cent per share, which
resulted in the reported earnings of 43 cents per share.
Following the strong results, Kraft revised its 2011 operating
earnings guidance to at least $2.27 from at least $2.25.
Revenues and Margins
Revenues in the quarter soared 11.5% to $13.2 billion, while
organic growth was 8.4% driven by strong top line growth in all
regions. Pricing accounted for 7.0 percentage points of growth and
volume and mix contributed 1.4 percentage points. Revenues
surpassed the Zacks Consensus Estimate of $12.8 billion.
Revenue grew in each of the geographies with the Developing
Markets leading the race with a double-digit growth in revenue of
20.3%, reflecting the benefits from continued focus on Power
Brands, core categories and key markets. In addition, revenues
increased 4.4% in North America and 16.1% in Europe.
Kraft also revised its organic revenue guidance for 2011 to at
least 6% from at least 5%.
Kraft’s operating income grew 11.8% to $1.7 billion, while
operating margin was the same for both the current and the
prior-year quarters at 12.8%.
Excluding acquisition-related and Integration Program costs,
underlying operating income surged 12.2% to $1.8 billion, driven by
effective input cost management, favorable foreign currency and
volume/mix growth. However, these were partially offset by SG&A
expenses and the negative impacts from the Starbucks CPG business,
a unit of Starbucks Corporation (SBUX). Underlying
operating margin also increased 10 basis points (bps) to 13.7% in
the third quarter of 2011.
Operating margins were achieved by effective input cost
management, while leveraging overheads and driving integration
savings.
Other Financial Details
As on September 30, 2011, Kraft had $2.0 million of cash and
cash equivalents compared with $2.3 million at the prior year
quarter end.
Kraft’s plan to spin off its North American grocery business to
its shareholders and split itself into two independent public
companies are on track. It will split into 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.
Kraft pointed out that until the separation is over, the
business will continue to be managed and reported as part of U.S.
Snacks. Further, Kraft stated that the North American Grocery
company will be named as Kraft Foods, as it has very strong
consumer recognition and brand equity in the U.S. and Canada. On
the other hand, the name for the Global Snacks company will be
decided by a shareholder poll in May 2012.
The Way Forward
The company continues to make tangible progress in cost
management, primarily driving negative overhead growth to cut costs
and improve effectiveness.
Further, we are encouraged by the company’s recently
strengthened business model by increasing investments in promotion
and marketing that increased its pricing power and improved product
positioning. These initiatives are paying off now, and margins are
improving.
Furthermore, the combination of Kraft and Cadbury is expected to
provide meaningful revenue synergies. Kraft also plans to capture
70% of the cost synergies by year end 2011, and expects revenue
synergies to contribute about 50 basis points to top line growth in
2011.
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.
CONAGRA FOODS (CAG): Free Stock Analysis Report
KRAFT FOODS INC (KFT): Free Stock Analysis Report
STARBUCKS CORP (SBUX): Free Stock Analysis Report
UNILEVER PLC (UL): Free Stock Analysis Report
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