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Kraft Foods May Reap Good Returns to Its Investors

April 21, 2014 | About:
abirk

abirk

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Kraft Foods Group (KRFT) concentrates its operations in North America. The company manufactures and markets food and beverage products, including convenient meals, refreshment beverages and coffee, cheese and other grocery products, in the U.S. and Canada, under a stable of iconic brands.

Its product categories span breakfast, lunch and dinner meal occasions, both at home and in foodservice locations. Kraft Foods Group Inc. announced plans to create two new, standalone business units: Meals and Desserts, and Enhancers and Snack Nuts. The company sells its products to supermarket chains, wholesalers, supercenters, club stores, mass merchandisers, distributors, convenience stores, drug stores, gasoline stations, value stores and other retail food outlets in the U.S. and Canada.

Offering an Array of Delicious Products

Even without the snack foods, the current iteration of Kraft Foods is still one of North America's largest consumer packaged food and beverage companies, with a market cap of about $33.75 billion and annual revenue of more than $18 billion.

With the spirit of a startup and the soul of a powerhouse, Kraft still has an unrivaled lineup of products in the beverages, cheese, refrigerated meals and grocery categories. The company's iconic brands include Kraft, JELL-O, Kool-Aid, Oscar Mayer and Velveeta.

Kraft Foods' brand portfolio consists of many of the most popular food brands in North America including two brands with annual net revenues exceeding $1 billion each. The company's brand portfolio includes Kraft cheeses, dinners, and dressings and Oscar Mayer meats, plus over 25 brands with annual net revenues between $100 million and $1 billion each.

A Peek-a-Boo on the Recent Performance

It's plain to see why Kraft continues to post the kind of key financial numbers that make its rivals drool with envy. Its trailing 12-month operating margin at the end of 2013 was nearly 27%. As of Dec. 28, 2013, its return on equity was an amazing 62% and its revenue per share was $30.67, equaling annual revenue of $18.22 billion, according to the company's financial report.

Since the corporate breakup from Mondelez (MDLZ), Kraft's management has prioritized profit above revenue growth. As a result, Kraft has operated as a more cost-efficient organization, focusing on metrics like free cash flow and return on invested capital. After cutting jobs and other expenses, the company possesses a leaner cost structure.

So far, Kraft's profitability-boosting efforts appear to be paying off. At the end of the third quarter, Kraft's free cash flow stood at $745 million year to date, and the company expects its full-year 2013 figure to come in at $1.2 billion, up from a previous $1 billion estimate. It generates annual revenues topping $18 billion and has guided for diluted earnings per share target of $3.58 for 2013.

Its fourth-quarter profit rose to $931 million, or $1.54 a share, from $90 million, or 15 cents a share, a year ago. The results include a $782 million one-time gain that added $1.11 a share. Revenue for the three months ended Dec. 28 rose 2.3% to $4.6 billion from $4.49 billion. Kraft Foods Group has a market cap of $32.0 billion and is part of the consumer goods sector.

Brewing Plans

Separately, the company said John Cahill, its executive chairman, will transition to non-executive chairman of Kraft's board on March 8. Cahill has held the post of executive chairman since Kraft was spun off from Mondelez International on Oct. 1, 2012. Kraft Foods Group, best known for products such as its namesake macaroni and cheese, is simplifying some of its foods to appeal to people looking for healthy foods and convenient meals.

The company, which has sold processed foods for years, knows that shoppers are becoming more conscious of what to eat and want more “fresh” and “real” foods, CEO Tony Vernon has said. Selling foods with no artificial colors, preservatives or flavors is something Kraft will focus on going forward, he said.

To appeal to diners looking for more protein, it is bringing out Philadelphia cream cheese with extra protein and portable protein packs with Oscar Mayer meat, Kraft cheese and Planters nuts. The snack-sized packs tout 14 grams of protein per snack, or an amount similar to the protein in two eggs.

Still, shoppers should not expect to see a massive overhaul. Kraft is also standing by those well-known, mainstream products that continue to fare much better in consumer preference tests. One of the “big bets” announced for this year is Kraft macaroni and cheese in the shapes of the Teenage Mutant Ninja Turtles, which is being advertised in a commercial featuring ‘90s rapper Vanilla Ice.

Late in 2013, McDonald's (MCD) announced that it will soon introduce packaged coffee under the McCafe brand. The company tied up with Kraft Food Group, which will be responsible for distributing and marketing the packaged products.

Expanding Deli Fresh Line

Oscar Mayer brand announced the boldest expansion of its Deli Fresh Lineof lunch meats ever, by introducing new Deli Fresh BOLD flavors. Deli Fresh BOLD lunch meats contain no artificial preservatives, no artificial flavors and are gluten free as Kraft continues to listen to consumer demand for food with simplified ingredient lists and bold, spicy flavors. These lunch meats are sealed at the peak of freshness, and at least 97 percent fat free.

The lunch meats are available nationwide and can be found in the refrigerated meat section at retail stores. An 8 oz. package retails at $3.99 SRP and the family-size package (16 oz.) retails at $5.99 SRP.

The new Deli FreshBOLD lunch meats will be available in four new flavor varieties including Italian Style Herb Turkey Breast, Cajun Style Turkey Breast, Maple Honey Ham and Chipotle Seasoned Chicken Breast. In a recent survey by Kelton1, 70 percent of those surveyed said deli counter meats are lacking interesting flavors. Deli Fresh BOLD varieties are the solution for those seeking bold-flavor lunch meats without artificial preservatives or artificial flavors.

To End

The company's strengths can be seen in multiple areas, such as its notable return on equity, revenue growth and compelling growth in net income. Compared to other companies in the Food Products industry and the overall market, Kraft Foods Group Inc.'s return on equity significantly exceeds that of both the industry average and the S&P 500.

Kraft is a good company with a solid dividend yield and will grow slowly over time. Because Kraft Foods Group focuses exclusively on North America, it does not have to deal with the European and Asian currency fluctuations that have been flummoxing its peers. The company is aware of the negative pathologies that were rendering and consigning it to mediocre performance and is working to transform its corporate culture away from that unhealthy model. It is expected to render healthy returns to its valued shareholders.


Rating: 4.5/5 (2 votes)

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Comments

vo_main_hun
Vo_main_hun - 7 months ago

Isn't North America saturated market for food industry where Kraft is focusing? I would rather prefer Mondelez which is focusing on emerging markets where huge population even don't get enough food and home made food from raw ingredient is prevalent culture. Huge potential for overall food industry growth in emerging market.

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