Kraft Gives Post-Spinoff Outlook - Analyst Blog
September 11 2012 - 4:00AM
Zacks
At an investor day held on
September 7th, Kraft Foods Inc.(KFT)
outlined the financial outlook for its soon to be spun off North
American grocery business. The financial targets for its
international snacks business, which is to be called Mondelez, were
unveiled at the Barclays Capital Back to School Consumer Conference
a day before the analyst day event.
Kraft is due to spin off its North
American grocery business into a separate independent company on
October 1. The North American grocery business will be called Kraft
Foods Group, Inc. and will trade under the ticker symbol KRFT.
Following the spin off, the current Kraft Foods, Inc. will be
called Mondelez International, Inc. and will focus on the global
snacks business. Mondelez will trade under the ticker symbol MDLZ.
The spin off is expected to be completed on October 1. Both the
companies are expected to start trading regularly on the NASDAQ
stock exchange from October 2.
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, which is to be spun-off from the current
company, would consist of the current US Beverages, Cheese,
Convenient Meals and Grocery segments and the non-snack categories
in Canada and Food Service.
Outlook for Kraft Foods
Group
At the investor day conference,
Kraft Foods highlighted that its North American Grocery Company
will deliver profitable top-line and bottom-line growth, while also
returning cash to shareholders in the form of dividends.
Long Term Outlook
Over the long term, organic
top-line growth is expected to be in line with or higher than the
North American food and beverage industry’s growth rate. Management
warned that market growth rates will fluctuate due to volatility in
input costs. The company is banking on innovation and brand
building to achieve the targets.
Operating income growth is expected
to be in the mid-single digit range and earnings growth should be
in mid-to-high single digit range.
Kraft Foods aims to generate
significant cash and is targeting to “put dollars in shareholders'
pockets, not margins”. Free cash flow is expected to be at least
85% of the net income. The free cash flow of this company will be
used mainly to pay steady, incremental dividends. The management
will recommend an annual dividend of $2.00 per share to the board
of directors. Dividends are expected to grow consistently in the
mid-single digit range.
2013 outlook
Organic revenue for this maker of
popular brands like Kraft cheeses, Oscar Mayer meat and Maxwell
House coffees are expected to be in line with the long-term growth
rates; i.e. equal to or above the market growth. The top-line
guidance includes a negative impact of up to 1 percentage point
from product pruning in North America.
Adjusted earnings (excluding
restructuring charges of 26 cents per share) are expected to be
$2.86 in 2013 and are expected to be driven by productivity
improvement and overhead savings. Interest expense is expected to
be $520 million and the effective tax rate will be 35%. The
earnings are expected to be more back-half weighted with 48% to be
generated in the first half and the balance in the next half.
Outlook for
Mondelez
Mondelez International highlighted
its 2013 and long-term outlook at the Barclays Back to School
Conference. Mondelez plans to drive long-term margins higher
through brand growth, overhead leverage and productivity
improvements. Mondelez will market popular snacks brands like
Cadbury, Jacobs, LU, Milka, Nabisco, Oreo, Tang and Trident.
Long Term Outlook
Over the long term, Mondelez is
expected to deliver organic revenue growth of 5%-7%. Organic growth
in Europe and North America are expected to be in the mid-single
digit range, while in developing markets it is expected to be in
double-digits.
Operating income is expected to
increase in high single digit range at a pace faster than revenues.
The growth is expected to be driven by operating expense leverage
and productivity savings. Operating earnings are thus
expected to grow in a double-digit range on a constant-currency
basis.
Mondelez warned that the guidance
may be below expectations due to currency headwinds (due to
Mondelez’s large international presence) and a higher-than-expected
tax rate. Mondelez expects a mid-20% tax rate over the long
term.
Unlike Kraft Foods Group, Mondelez
will be reinvesting excess earnings in the business to drive
long-term growth rather than paying back to investors. It will also
be on the lookout for accretive acquisitions, particularly in the
developing countries. The balance will go to investors in the form
of share buybacks/dividends and to pay down debt. The company will
pay an annual dividend of 52 cents per share.
2013 Outlook
In 2013, Mondelez expects its
organic top-line to grow at the lower end of its long-term range of
5%-7%. Pricing and the challenging economic conditions are expected
to lead to lower growth versus the long term targets.
Constant currency operating
earnings are expected to range between $1.50 and $1.55, which
includes currency headwinds of about 15 cents.
Our
Recommendation
We currently have a Neutral
recommendation on Kraft Foods. The stock carries a Zacks #3 Rank (a
short-term ‘Hold’ rating).
We are optimistic about Kraft
Foods’ diverse brand portfolio, reinvestment in core brands, focus
on innovation, strong momentum of power brands and significant
exposure to the fast growing emerging markets. Further, the
spin-off is expected to allow Kraft to focus on its distinct
strategic priorities and allocate resources optimally. With the
spin-off to be completed in less than a month, we prefer to wait
and see how it unlocks value.
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