Value Thoughts - Kraft Foods, Inc.
Kraft Foods, Inc. (NYSE: KFT) is the world’s second largest food company. The company manufactures and markets packaged food products, including biscuits, confectionery, beverages, cheese, convenient meals and various packaged grocery products, selling to consumers in 170 countries. The company has operations in 75 countries, employing approximately 127,000 people, and operating 223 manufacturing and processing facilities.
Because the company is a holding company, their principal source of funds is from their subsidiaries, none of which are currently limited by long-term debt or other agreements in their ability to pay cash dividends or make other distributions with respect to their common stock.
Financial information presented in this report for Kraft Foods, Inc., is based on the company's most recent SEC Form 10-K filing for year ending December 31, 2010, as filed with the Securities and Exchange Commission on February 28, 2011.
The stock closed recently at $33.85, with first Resistance at $34.00, a 0% increase from the recent close, first Support at $32.05, a 5% decline from the recent close, and second Support at $31.14, an 8% decline from the recent close. Should the stock price fall through second support, the next support level is currently $27.49, 19% decline from a recent close.
Long-Term (5 Year Hold) Investment
In review of the company's latest annual financial information we note that the Current Ratio at 1.04, the Quick Ratio at 0.58, and the Cash Ratio at 0.16, were all well short of what we consider investment quality. We also note that Total Debt at 4 times EBITDA and 2 times Net Fixed Assets, and Goodwill and Intangibles making up 67% of the company's Total Assets are additional metrics that were well below what we consider investment quality.
On the positive side, Return On Invested Capital at 21%, Free Cash Flow at $2.05 per share, an 18% year over year increase, and year over year Earnings Growth of 14% all exceeded our investment quality metrics.
We are value investors, attempting to determine the value of an entire company based on its most recent audited financial information. As such, we simply refuse to pay for earnings growth and make no inclusion of it in our valuation estimates.
However, we realize that many investors focus on earnings growth, basing investment decisions on the spread between year over year earnings growth and the current PE.
In the case of Kraft Foods, Inc., the company had year over year earnings growth of 14%, ending FY10 with earnings of $2.38 per share. With a current PE of 14, the spread between earnings growth and the PE is about 1, meaning that for a value investor considering earnings growth, a fair value for the stock is about $36.00, if the stock were purchased at its recent close.
Based on our review of the company's latest annual financial information we think a Reasonable Value Estimate for the company is in the $28-$29 range.
Assuming all due diligence was performed prior, we would set a Buy Target in the $17 range, a First Sell Target in the $34 range, and a Close Target in the $35-$36 range.
Based on our assessment of the company financial information that we reviewed, we believe a reasonable financial risk multiplier is 72. Accordingly, for the more risk averse value investor, we would set a Buy Target in the $12-$13 range.
Considering a recent close of $33.85, an estimated Merger and Acquisition payback of 12 years (assuming EBITDA remains the same), and Free Cash Flow of $2.05, we think the stock is currently fairly valued, and a not a candidate for additional research for the Wax Ink Portfolio.
We have no position in Kraft Foods, Inc. and no plans to initiate a position in the next 5 business days. Additionally, we have received no compensation to write about a specific stock, sector, or theme.