Kraft Food (NASDAQ:KRFT)

CAPS Rating: 4 out of 5

The king of comfort food, Kraft is the leading U.S. food company with brands that include Nabisco, Oreo, Oscar Mayer, and, of course, Kraft Macaroni & Cheese.

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Player Avatar TrackZacks (< 20) Submitted: 7/31/2012 4:54:37 PM : Underperform Start Price: $39.71 KRFT Score: +1.26

Earnings Preview: Kraft Foods
By: Zacks Equity Research
July 31, 2012

Food and beverage giant Kraft Foods Inc. (KFT - Analyst Report) is all set to unveil its second quarter 2012 results on August 2, 2012, after the market closes. The Zacks Consensus Estimate for the second quarter is 67 cents (estimated year-over-year improvement of 8.1%) on revenues of $14.1 billion (year-over-year increase of 6.7%).

First Quarter Recap

Kraft Foods started the year on a strong note with adjusted earnings of 57 cents per share exceeding the Zacks Consensus Estimate by a cent and the prior-year quarter earnings by 5 cents per share.

Solid top-line growth and effective cost management boosted earnings in the quarter. Revenues in the quarter rose 4.1% to $13.1 billion, in line with the Zacks Consensus Revenue Estimate. Organic revenues were up 6.5% driven mainly by pricing gain. New product launches and impressive growth of Power Brands also added to the top-line increase.

Adjusted operating income surged 5.8% to $1.85 billion in the quarter, driven by effective cost management and volume/mix gains, which offset the negative impact from increased input cost and advertising spend. Kraft reaffirmed its previously provided constant currency revenue and earnings guidance.

Kraft Foods is in the process of separating into two independent public companies: a global snacks company and a North American grocery company.

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 US Beverages, Cheese, Convenient Meals and Grocery segments and the non-snack categories in Canada and Food Service. The transaction is expected to be completed before the end of 2012.

The North American grocery business, which includes popular brands like Oscar Mayer meat and Kraft cheese, will be an independent public company called Kraft Foods Group, Inc. and will trade under the ticker symbol KRFT. The snacks company to be called Mondelez International, Inc. will market popular brands like Cadbury, Jacobs, LU, Milka, Nabisco, Oreo, Tang and Trident and will trade under the ticker symbol MDLZ.

Agreement of Estimate Revisions

Over the past 30 days, only 1 of the 14 estimates on Kraft Foods has been downwardly revised for the second quarter of 2012. For fiscal 2012, 3 of the 15 estimates have been revised downwards. None of the estimates have moved in the opposite direction in the last 30 days. There have been no estimate revisions over the last 7 days.

The first quarter results benefited from shift of Easter-related shipments into the first quarter. The absence of this tailwind this quarter partly explains the downward pressure on earnings.

Magnitude of Estimate Revisions

Given the limited number of estimate revisions, the consensus estimate for the second quarter of fiscal 2012 has remained static over the last 7 as well as 30 days at 67 cents. The consensus estimate for fiscal 2012 has gone down by a cent from $2.51 to $2.50 over the last 30 days.

Surprise History

Kraft Foods has surpassed earnings estimates in three of the past four quarters, recording a maximum positive surprise of 6.90% in the second quarter of 2011. On average, the earnings surprise was a positive 4.09%.

Our Recommendation

We currently have a Neutral recommendation on Kraft Foods. The stock carries a Zacks #4 Rank (a short-term Sell rating).

We are encouraged by Kraft Foods’ diverse brand portfolio, significant exposure to the fast growing emerging markets and continued strong momentum from the core brands (Power Brands). Further, Kraft Foods has been delivering much better sales and profit performance in Europe despite the region’s economic challenges and unlike most peers.

Moreover, the split of its North American business is expected to allow Kraft to focus on its distinct strategic priorities and allocate resources optimally. However, we remain concerned about rising input costs and a slow economic recovery.

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