Why Kraft Foods is a Good Buy at Current Levels

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Mar 02, 2015

Kraft Foods (KRFT) is one of the largest consumer packaged food and beverage companies in North America and worldwide. Kraft Food manufactures food and beverage products, including cheese, meats, refreshment beverages, coffee, packaged dinners, refrigerated meals, snack nuts, dressings, and other grocery products, primarily in the United States and Canada. Its product categories span breakfast, lunch, and dinner.

Kraft Foods reports its results through six reportable segments: Cheese, Refrigerated Meals, Beverages, Meals & Desserts, Enhancers & Snack Nuts, and Meat.

Net Revenues by Product Category (Source 10-K filing)

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After a tough first nine months of 2014, when the company's organic revenue growth was down ~1%, things have started improving for Kraft Food from the fourth quarter. The company's Q4 organic revenue growth of 3.40% last quarter outpaced North America food and beverage industry growth of 2.40%. Volume mix contributed 1.5 percentage points to growth while pricing was up nearly 2%. The company's aggressive pricing action in light of commodity price increases were largely accepted by consumers. Kraft also continues to do well in terms of innovations. Its new products Oscar Mayer P3, McCafe coffee and the rejuvenation of its Philadelphia soft cream cheese lines were all well received by the customers.

Going forward, the company continues to work on building a robust product pipeline of quality products to meet evolving consumer preferences. The company has recently announced leadership changes where it has promoted two of its key managers — George Zoghbi and Chris Kempczinski — to new positions where they will partner with the rest of its leadership to develop plans that target innovation and brand rejuvenation built on clear priorities. This change will help the company accelerate pace of innovation.

In addition to the company specific initiatives, I believe several macro tailwinds will also help Kraft in 2015. First, Kraft's commodity basket (cost of raw materials) is trending down, which will help the company's margins going forward. Second, recent correction in crude oil prices is easing financial pressure on consumers leaving them with more to spend. Consumer food companies like Kraft are set to benefit from this increased spending. And finally, Kraft is primarily a North American company. While its peers with significant foreign exposure are likely to see headwinds from stronger US dollar, Kraft will not face any such problem. In fact, of late fund managers are seen preferring the companies which derives most of their revenues from the US. So, Kraft Foods is likely to see more investor interest in 2015.

Kraft Foods is trading at 18.41 times FY2016 EPS. According to sell side estimates, the company’s EPS is expected to grow 3.12% in the current fiscal year and 7% next fiscal year. The company has a dividend yield of 3.40%. Out of 16 analysts covering the company, five are positive and have buy recommendations, six have hold ratings and one has a sell rating. Given the company’s good growth prospects, high dividend yield and reasonable valuations, I recommended buying the stock.