In the August 5, 2011, Wall Street Stock Forecaster hotline, we updated our buy/sell/hold advice on one of our long-time top stock picks, Kraft Foods Inc. (symbol KFT on New York). Kraft is the world’s second-largest food company, after Switzerland-based Nestle. Its owns many well-known brands, including Philadelphia cream cheese, Maxwell House coffee, and Oscar Mayer meats
Top stock picks: Kraft breakup could unlock hidden value
Kraft just announced plans to break itself into two separate, publicly traded companies. One company will sell snack foods, such as Oreo cookies, Cadbury chocolates, Trident gum and Tang powdered beverages. This business will have annual sales of $32 billion, with 42% of that coming from fast-growing markets, such as China, Brazil and India.
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The other company will consist of Kraft’s slower-growing grocery-products business, which mainly sells its foods in North American supermarkets. These products include Kraft macaroni and cheese, Oscar Mayer meats, Philadelphia cream cheese, Maxwell House coffee, Jell-O desserts and Miracle Whip salad dressing. This company will have $16 billion of annual sales.
Kraft didn’t give any further details on the break-up, but the company aims to complete it before the end of 2012.
Breakups like this can help unlock hidden value, and often lead to above-average results. The new standalone companies may also be more attractive takeover candidates.
Rising ingredient costs, greater competition could weigh on Kraft’s earnings
The company reported higher sales and earnings in the latest quarter. But like most big food companies, Kraft is facing rising ingredient costs. So far, it has been able to pass these costs on to its customers through price increases, but the company faces rising competition from cheaper, private-label brands. That could make it harder for Kraft to continue raising its prices.
We’ll continue to monitor Kraft’s progress, including its upcoming breakup and its plans for dealing with rising competition and higher ingredient costs. You can get our very latest buy/sell/hold advice on Kraft and other top stock picks in our monthly Wall Street Stock Forecaster issues and weekly Email/Telephone Hotlines.
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