We expect Kraft Foods Group, Inc.(KRFT) to beat expectations when it reports fourth-quarter and full-year 2014 results on Feb 12.
Why a Likely Positive Surprise?
Our proven model shows that Kraft is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen.
Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +1.37%. This is a meaningful and leading indicator of a likely positive earnings surprise for shares.
Zacks Rank: Kraft carries a Zacks Rank #3 (Hold) which when combined with a +1.37% ESP makes us confident of an earnings beat.
Note that stocks with Zacks Rank #1, 2 or 3 have a significantly higher chance of beating earnings. The Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.
Factors to Consider
Kraft’s top line has been soft ever since it split from Mondelez International Inc. (MDLZ) in Oct 2012 due to difficult operating environment emanating from rapid changes in consumer preferences and behavior.
In the first nine months of 2014, Kraft recorded flat organic revenue growth which lagged the broader food and beverage industry growth of 1.7% due to weak volumes. Price increases to cover rising commodity costs and softness in certain categories due to lack of innovation/brand building activities hurt volumes in the same time frame.
Further, the costs of key ingredients like cheese and meat reached record highs in 2014 compelling Kraft to raise prices of most of its products. The led to market share losses, lower volumes and gross margin weakness in the past 2-3 quarters.
However, in the fourth quarter, management expects to record higher organic growth than the third.
Moreover, higher prices, lower advertising costs (due to efficiency gains), manufacturing productivity gains and lower overhead costs are making up for the weak volumes and increased commodity costs to result in better operating profits for Kraft.
Stocks to Consider
Here are a couple of other food stocks that have both a positive Earnings ESP and a favorable Zacks Rank:
SUPERVALU, Inc. (SVU), with an Earnings ESP of +4.76% and a Zacks Rank #1 (Strong Buy).
The J. M. Smucker Company (SJM), with an Earnings ESP of +1.33% and a Zacks Rank #3.
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