Kraft Foods Inc. (NYSE: KFT) is the largest branded food and beverage company headquartered in the U.S. and the second largest worldwide. The company markets some of America’s best known food brands such as Kraft, Oscar Meyer, Nabisco, Maxwell House, Jell-O, Planters, Ritz Crackers, Oreo Cookies, and Kool-Aid. Its products are sold in more than 160 countries.1 Kraft completed the acquisition of Cadbury in March 2010 for about $20.8 billion in cash and stock.6 Kraft says the deal “creates a global powerhouse in snacks, confectionery and quick meals” and expects significant cost savings and synergies that will increase revenue.1
As of July 6, 2010, KFT sold for $28.25 per share with a 1 year Target Estimate of $33.65, a 52 week Range of $25.41 - $31.09, a Forward Annual Dividend Yield of 4.20%, P/E (ttm) of 10.12, a Market Cap of $49.25B, Total Debt (mrq) of $31.04B, Revenue (ttm) of $42.72B, Operating Cash Flow (ttm) of $4.66B, Levered Free Cash Flow (ttm) of $4.89B, Operating Margin (ttm) of 13.87% and Profit Margin (ttm) of 9.93%.5
What I Like About Kraft:
1. Many great brands with huge name recognition. Kraft’s products are present in more than 99 percent of U.S. households. Kraft has approximately 70 brands with annual revenues over $100 million and 11 brands with revenues over $1 billion (Cadbury, Nabisco, Maxwell House and Oscar Mayer are a few). Kraft, Jacobs, LU, Maxwell House, Cadbury, Trident, Milka, Nabisco, Oreo, Philadelphia, and Oscar Mayer).1
2. A dominant industry position. Kraft is the world’s second largest food company with annual revenues of $48 billion. Over 80% of its revenues come from products that hold the No. 1 share position in their respective categories, and more than 50% of its revenue comes from categories where its market share is twice the size of the nearest competitor. More than 40 of its brands are over 100 years old. As a result of the Cadbury acquisition, Kraft has tripled its share of the global chocolate and candy market to about 15% of the total market.1
3. Balanced North American and international sales. With the Cadbury acquisition, 49% of sales are in North America, 25% in Europe and 26% in Developing Markets.
3. Economies of scale and cost savings due to the Cadbury acquisition. Kraft believes the Cadbury acquisitionwill create new revenue andsavings opportunities. Revenue synergies are expected from an aggressivemove into emerging internationalmarkets, like China and India, where Cadbury already has a strong presence. Cost savings of at least $675 million are expected over the first few years from facility consolidation and economies of scale. Kraft expects the combined company to deliver long-term organic net revenue growth of 5% or more and EPS growth of 9 to 11%.5 Kraft has said that one of the key benefits of buying Cadbury is its distribution infrastructure in the India market, and India is now one of Kraft’s 10 focus markets. In addition, Kraft plans to use Cadbury's strength in U.S. convenience stores to sell more snack products.1
4. Large and Stable Dividend. Kraft has paid a quarterly dividend since 2001 when it began trading on the New York Stock Exchange and the company says “we intend to pay regular quarterly dividends on our Class A common stock.” The first quarterly dividend was $0.13 per share in the third quarter of 2001 and has been $0.29 for the past 8 quarters, but it has never decreased. Although the dividend growth rate slowed beginning in 2008, from 2002-2007 it grew at an annual compounded rate of 13%.1 The current Forward Annual Dividend Yield is 4.20%.2
Concerns I Have About Kraft:
1. The Food industry is very competitive. Kraft has great brands but faces increasing competition from lower-priced private label products, some of which are of such high quality that they earn consumer loyalty and are effective competitors.
2. I am concerned that Warren Buffett thinks Kraft overpaid for Cadbury. I have great respect for Mr. Buffett and don’t doubt that he is correct. However, even if they overpaid, Kraft was believed by Buffett and others to be significantly undervalued and that provides a margin of safety in case Kraft isn’t able to achieve all the advantages they hope the Cadbury acquisition will provide.
I think Kraft will maintain its value and pay a 4.2% dividend yield, and in this economy I’m happy with that for the next few years. Over the long-term I expect Kraft to be a good investment.
Sources:
(2) Yahoo Finance
(3) Data collected from Kraft’s 2009, 2004, and 2001 10-K statements.
(4) Kraft’s Q1 10-Q for 2010.
(5) Value Line
(6) Bloomberg Reports
Disclosure: Long position in Kraft stock
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