Risk/Reward Balanced at Kraft Foods - Analyst Blog
August 13 2012 - 2:23PM
Zacks
We maintain a Neutral rating on Kraft Foods
Inc. (KFT) following the appraisal of second quarter 2012
results.
Kraft Foods’ second quarter 2012 earnings of 68 cents beat the
Zacks Consensus Estimate by 3% and the prior-year quarter earnings
by 9.7%. The top-line performance of the company was weak.
This weakness was offset by margin expansion, which eventually
lifted the quarter’s earnings. Top line declined 4.3%, mainly due
to currency fluctuations and the shift of Easter-related shipments
to the first quarter.
Despite the soft second quarter, Kraft reaffirmed its constant
currency revenue and earnings guidance. Kraft Foods expects organic
revenue to grow approximately 5% in 2012 and operating earnings to
increase to at least the lower end of its long-term guidance of
9-11% on a constant currency basis.
Read our full report at Kraft Foods Tops EPS; Sales Lag
Kraft Foods has some dominant positions in some high-growth food
categories, and fast-growing markets. Among the 80 brands in its
portfolio, 12 Kraft products generate revenues in excess of $1
billion. These core brands, called Power Brands, are significantly
driving company’s organic growth.
Kraft’s brand-building and advertising investments in core
brands are winning customers for the company around the world.
These initiatives have enabled Kraft to enjoy more pricing power
and improve product positioning against lower-priced private label
brands.
The company has been able to successfully implement price
increases despite rising commodity costs and advertising spends,
while also maintaining positive volume growth and is gaining market
share.
The company has expanded into key developing markets, such as
China, Brazil, India, Mexico, Russia and Southeast Asia, encouraged
by the high-growth nature of these countries. In 2011, the
developing market was the strongest performing segment for the
company and is proving to be the key growth driver in 2012.
Moreover, the acquisition of Cadbury in 2010 placed Kraft in
higher growth geographies and categories. Cadbury has opened new
sales channels for the company through its vast distribution
networks in developing markets such as India, Brazil and
Mexico.
Kraft is due to spin off its North American grocery business
into a separate independent company on October 1. The decision is
expected to help the company expand its global presence, besides
giving investors a chance to bet on a snacks business that is
growing fast in the emerging markets, or opt for the stable
dividends offered by a slower-growing general grocery business that
includes Oscar Mayer meat and Kraft cheese.
However, we remain concerned about rising input costs, currency
headwinds, and slow economic recovery. The rising prices of
commodities have limited Kraft Foods’ pricing policies, thereby
squeezing its profitability. Overall, we expect commodity costs to
continue to be volatile and increase overall in 2012.
Further, though the overall economy is recovering, the process
is relatively slow. Slow job growth, high interest rates and still
tightened credit availability continue to hurt costumer
discretionary spending.
(): ETF Research Reports
KRAFT FOODS INC (KFT): Free Stock Analysis Report
KRAFT FOODS INC (KFT): Free Stock Analysis Report
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