In this article, let's take a look Kraft Foods Group, Inc. (KRFT, Financial), a $34.43 billion market cap company, which is one of the largest consumer packaged food and beverage companies in North America,
Kraft and Oscar Mayer
The company´s business includes two brands, Kraft and Oscar Mayer, with annual net revenues exceeding $1 billion each and other 10 brands, each generating more than $500 million as well as important economies of scale on its home turf (with more than $18 billion in annual sales). We see one possible risk here, that quantity demanded reacts more than proportionally to changes in prices (what is known in economy with the name of elasticity) in some products such as packaged meats and cheese.
New Products
The last success is MiO, the water enhancer that drives more than $100 million in annual revenue. In the last three years, the company introduced new products like the previously mentioned, Velveeta Skillets, and Jell-O Temptations. They represented about 14% of revenue in fiscal 2013, more than doubling its 2009 level.
Cost Management Focus
The firm plans to improve the efficiency of its organization. In that sense, it plans to realign its U.S. sales organization, consolidating domestic management centers, and streamlining the corporate and business unit organizations. There are plans which aim to aggressively reduce costs and improve efficiencies in order to reach productivity gains.
Cost reductions will be a profit key driver for the next years in the industry. Further, the management is seeking for opportunities related to strategic sourcing initiatives, improve optimization and supply chain simplification.
Revenues, Margins and Profitability
Looking at profitability, the revenue declined by 3.3% when compared to the same quarter one year prior. The gross profit margin of 38.12% is considered high and it has increased from the same quarter the previous year. With respect to the net profit margin, it is 11.76% and is above that of the industry average. Earnings per share increased by 11.8% in the most recent quarter compared to the samequarter a year ago ($0.85vs $0.76).
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| KRFT | Kraft | 52.34 |
| HSH | Hillshire Brands Co. | 52.07 |
| NSRGY | Nestle SA | 15.61 |
| Â | Industry Median | 7.99 |
The company has a current ROE of 52.34% which is higher than the one exhibit by Nestle (NSRGY, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So Kraft and Hillshire Brands Co (HSH, Financial) have interesting ratios.
It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 12.5x, trading at a discount compared to an average of 24.6x for the industry. To use another metric, its price-to-book ratio of 6.5x indicates a premium versus the industry average of 1.9x while the price-to-sales ratio of 1.9x is above the industry average of 1.06x. At that PE it looks that the stock is relatively undervalued and makes sense to buy the stock.
As we can see in the next chart, the stock price has an upward trend in the total period.
Final Comment
We think that the U.S. food markets sector is mature as well as very competitive. The processed food industry is facing low growth rates and high energy costs, like electricity and fuel, but still remains opportunities for companies that make acquisitions, cost reduction programs or differentiation strategies. We expect volumes in the next future to look better than they have in the past year due to the modest signals of recovery in the U.S. economy.
Hedge fund gurus like Joel Greenblatt (Trades, Portfolio), Steven Cohen (Trades, Portfolio), John Keeley (Trades, Portfolio) and Ken Fisher (Trades, Portfolio) added this stock to their portfolios in the first quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
