Kraft Foods Inc. $32 – New York symbol KFT

KRAFT FOODS INC. $32 (New York symbol KFT; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 1.6 billion; Market cap: $51.2 billion; WSSF Rating: Above average) is the world’s second-largest food company after Swissbased Nestle. Leading brands include Kraft (cheese), Maxwell House (coffee), Nabisco (biscuits and cookies) and Oscar Meyer (meats). In November 2007, Kraft agreed to merge its Post cereals business with Ralcorp Holdings Inc. (New York symbol RAH). Kraft will receive $2.6 billion in cash and Ralcorp shares. Prior to the closing of the deal in mid-2008, Kraft will hand out the Ralcorp shares to its own stockholders in a way that will let them avoid capital gains taxes. Kraft stockholders will then own 54% of Ralcorp. In 2007, Kraft’s revenue rose 8.1%, to $37.2 billion from $34.4 billion in 2006. These figures include the Post cereal operations. However, earnings before onetime items fell 6.2%, to $1.82 a share (total $2.9 billion) from $1.94 a share ($3.2 billion). Higher raw material costs, particularly milk, offset the gains from its restructuring plan. Kraft’s stock moved up recently on news that Warren Buffett’s Berkshire Hathaway now owns 8.6% of the company. Billionaire investor Nelson Peltz also owns 3% of Kraft. We don’t always agree with their investment decisions. But we do share their views on the strong potential of Kraft’s brands. Kraft trades at 16.8 times its likely 2008 earnings of $1.90 a share. The $1.08 dividend yields 3.4%. Kraft Foods is a buy.