Kraft Foods Inc. (KFT) posted second quarter 2011 operating EPS went up 1.9% year over year to $0.55 a share. However, the earnings missed Zacks Consensus Estimate of $0.58 by 5.4%.
Management credited the benefits of increased investments in marketing and innovation, and focus on End-to-End Cost Management for strong results in the quarter.
Revenues and Margins
Revenues in the quarter soared 13.3% to $13.9 billion, while organic growth was 7.1% driven by strong top line growth in all regions. Pricing accounted for 5.5 percentage points of growth and volume and mix contributed 1.6 percentage points. However, Easter related shipments partially offset the growth by 1.5 percentage points.
Revenue grew in each of the geographies with the Europe Markets leading the race with an increase in revenue of 26.2%. It was followed by an increase of 22.3% in Developing Markets and 2.5% in North America.
Operating income grew 4.4 percent to $1.9 billion reflecting favorable currency, volume/mix gains and lower overheads.
Operating Income margin declined 120 basis points from the prior year quarter to 14.0%, essentially due to the negative impact of pricing on the margin calculation.
As on June 30, 2011, Kraft Foods had $2.3 million of cash and cash equivalents compared with $2.8 million at the prior year quarter.
Splitting Up
Kraft has announced that it plans to spin off its North American grocery business to its shareholders and split into two independent public companies: a high-growth global snacks business with estimated revenue of approximately $32 billion and a high-margin North American grocery business with estimated revenue of approximately $16 billion.
Global snacks will consist of the current Kraft Foods Europe and Developing Markets units as well as the North American snacks and confectionery businesses. The North American grocery business would consist of the current U.S. Beverages, Cheese, Convenient Meals and Grocery segments and the non-snack categories in Canada and Food Service.
The Way Forward
Kraft is stated to drive confidence from the belief of continuing strong business momentum in the challenging environment of weak consumer and category growth as well as significant input cost inflation.
The confidence is thus reflected in its 2011 outlook and the company expects to have an organic net revenue growth of at least 5%. Management expects the operating EPS to be at least $2.25.
Conclusion
We are encouraged by the company’s recently strengthened business model through investments in quality upgrades, promotions and marketing as well as initiatives taken to improve margin and productivity by reducing manufacturing and overhead costs and enhancing operational efficiencies by modernizing plants and information systems.
However, higher commodity costs, increased marketing expenses, competition from private labels and presence of tough competitors like Unilever Plc. (UL) and ConAgra Foods Inc. (CAG) concern us.
Currently, we prefer to rate the stock as Neutral. Further, Kraft Foods holds the Zacks #3 Rank, which translates into a short-term Hold rating.
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