KRAFT FOODS GROUP INC. $54 (Nasdaq symbol KRFT; Conservative Growth and Income Portfolios, Consumer sector; Shares outstanding: 595.6 million; Market cap: $32.2 billion; Price-to-sales ratio: 1.8; Dividend yield: 3.9%; TSINetwork Rating: Above Average; www.kraftfoodsgroup.com) makes a variety of grocery products, including Kraft macaroni and cheese, Oscar Mayer meats, Philadelphia cream cheese, Maxwell House coffee, Jell-O desserts and Miracle Whip salad dressing.
North American focus brings stability
Kraft gets all of its sales from North America, which limits its risk. Moreover, its well-established brands give it steady cash flow: 10 of its banners each generate annual sales of over $500 million.
The company took its current form on October 1, 2012. That’s when the old Kraft Foods Inc. broke itself into two publicly traded companies: Mondelez International (Nasdaq symbol MDLZ), which focuses on snack foods, and Kraft Foods Group.
If you assume the breakup occurred at the start of 2008, Kraft’s sales would have fallen from $17.7 billion in 2008 to $17.3 billion in 2009. Sales rebounded to $17.9 billion in 2010 and to $18.7 billion in 2011, but they dipped to $18.3 billion in 2012.
Earnings rose 34.9%, from $2.38 a share (or a total of $1.4 billion) in 2008 to $3.21 a share (or $1.9 billion) in 2009. Earnings then fell to $2.75 a share (or $1.6 billion) in 2012.
Following the split from Mondelez, Kraft began a major restructuring that mainly involves closing plants and making its remaining operations more efficient. It expects to spend $650 million on these initiatives by the end of 2013. Kraft did not say how much it expects to save, but lower expenses will put it in a better position to handle higher ingredient costs.
Ready to invest in growth projects
The savings will also let Kraft spend more to develop innovative products. In 2012, it spent $178 million (or 1.0% of its sales) on research, down 10.1% from $198 million (or 1.1% of sales) in 2011.
Still, it has recently launched several successful new products, including a zero-calorie Crystal Light drink mix and a version of its Philadelphia Cream Cheese with twice the protein as the regular product.
Kraft also plans to spend more on marketing. Advertising costs jumped 19.6% in 2012, to $640 million (or 3.5% of sales) from $535 million (or 2.9%).
The company’s balance sheet is strong. As of June 29, 2013, its long-term debt was $10.0 billion, which is a manageable 31% of its market cap. It also held cash of $1.2 billion, or $1.95 a share.
Improving earnings will lower p/e
The stock has gained 18% since Kraft became a stand-alone company. It now trades at 19.3 times its likely 2013 earnings of $2.80 a share. Earnings should improve to $3.19 a share in 2014; the stock trades at a more reasonable 16.9 times that forecast.
The company has also raised its dividend for the first time since the breakup. The new annual rate of $2.10 a share, up 5.0% from the old rate, yields 3.9%.
Kraft Foods Group is a buy.
