We maintain a Neutral rating on Kraft Foods Inc. (KFT) following appraisal of fourth quarter and full year 2011 results.
Kraft Foods posted fourth-quarter 2011 operating EPS of 57 cents per share, (excluding integration and spin-off costs), which was in line with the Zacks Consensus Estimate. However, it went up 23.9% from the prior-year quarter. Robust sales growth driven by price increases and effective cost management boosted earnings in 2011.
Revenues in the quarter rose 6.6% to $14.7 billion, while organic growth was 6.1%. In fiscal 2011, revenues increased 10.5% to $54.4 billion, while organic growth was 6.6% driven by an impressive performance in the developing markets and favorable pricing /mix. Overall, we are encouraged by Kraft’s strategy of continued cost management and price increases.
Kraft Foods is one of the largest branded food and beverage companies in the US and the second largest in the world. Among the 80 brands in its portfolio, 12 Kraft products generate revenues in excess of $1 billion. Kraft’s well performing, strong-margined core brands have been christened Power Brands. Power Brands grew 8% in 2011 to boost top-line growth and we believe these will continue to drive growth in 2012.
The company is also expanding into key developing markets, such as China, Brazil, India, Mexico, Russia and Southeast Asia, encouraged by the economics of these countries. In 2011, the developing market was the strongest performing segment for the company and is expected to be the key growth driver in 2012.
Moreover, the acquisition of Cadbury in 2010 placed Kraft in higher growth geographies and categories. Cadbury has opened new sales channels for the company through its vast distribution networks in developing markets such as India, Brazil and Mexico.
Kraft Foods plans to separate into two independent public companies: a high-growth global snacks business and a high-margin North American grocery business. The decision is expected to help the company expand its global presence besides giving investors a chance to bet on a snacks business that is growing fast in emerging markets, or opt for the stable dividends offered by a slower-growing general grocery business that includes Oscar Mayer meat and Kraft cheese.
However, we remain concerned about rising input costs and vulnerability to currency translations. The rising prices of commodities have limited Kraft Foods’ pricing policies, thereby squeezing its profitability. During 2011, total commodity costs increased by $2.6 billion year over year against a more modest $1 billion rise in the prior year. Overall, we expect commodity costs to continue to be volatile and increase overall in 2012. We thus prefer to remain on the sidelines.
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