Is This a Krafty Investment?

With shares of Kraft Foods Group (NASDAQ:KRFT) trading at around $51.53, is KRFT an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

The global snacks business now belongs to Mondelez International (NASDAQ:MDLZ). This limits growth potential for Kraft. However, this slimmed down version of Kraft also allows for more focus. Furthermore, the brand portfolio is still exceptional. Here’s a quick list:

  • Planters
  • Miracle Whip
  • Jell-O
  • Capri Sun
  • Kool-Aid
  • Kraft (dressings)
  • Velveeta
  • Philadelphia
  • Maxwell House
  • Oscar Mayer
  • Crystal Light

It would be safe to assume that these brands aren’t going anywhere, and that they will continue to sell without a problem. Perhaps that’s why analysts love this stock. Of 20 analysts covering Kraft, 12 have rated it a Buy, 8 have rated it a Hold, and 0 have rated it a Sell. Stifel Nicolaus recently rated it a Buy and increased its price target to $55.

Much of the cash flow generated by Kraft will be used to reward shareholders. Currently, Kraft is yielding an impressive 3.90 percent. As far as the business itself goes, Kraft is focused on high margins and cost efficiency. These are good signs. The only potential negative is that Kraft attempted to keep prices high as competitor prices dropped, which didn’t pan out as well as Kraft had hoped. On the other hand, it was still the correct decision. It’s always best to start high and drop prices if necessary. Dropping prices immediately traps the seller into a box and can lead to a myriad of troubles.

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The chart below compares fundamentals for Kraft, H.J. Heinz Company (NYSE:HNZ), and Campbell Soup Company (NYSE:CPB). These three companies differ in size. Kraft has a market cap of $30.58 billion, Heinz has a market cap of $23.17 billion, and Campbell Soup has a market cap of $14.25 billion.

KRFT

HNZ

CPB

Trailing   P/E

18.74

23.56

19.42

Forward   P/E

16.46

19.02

16.74

Profit   Margin

8.95%

8.49%

9.12%

ROE

16.29%

34.57%

62.08%

Operating   Cash Flow

$3.04 Billion

$1.43 Billion

$1.14 Billion

Dividend   Yield

3.90%

2.90%

2.60%

Short   Position

N/A

1.50%

7.30%

 

In comparison, Kraft is currently offering the best valuation as well as the highest yield. Profit margins are essentially even. Let’s take a look at some more important numbers prior to forming an opinion on this stock.

E = Equity to Debt Ratio Is Weak   

The debt-to-equity ratio for Kraft is considerably weaker than the industry average of 0.80. This is perhaps the biggest negative for Kraft, but this number is likely to improve moving forward.

Debt-To-Equity

Cash

Long-Term Debt

KRFT

2.79

$1.26 Billion

$9.97 Billion

HNZ

1.62

$1.11 Billion

$5.03 Billion

CPB

3.90

$416.00 Million

$4.51 Billion

 

T = Technicals Are Strong

Kraft has performed well since the spinoff. The impressive yield has been an added bonus.

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1 Month

Year-To-Date

1 Year

3 Year

KRFT

7.34%

14.44%

N/A

N/A

HNZ

0.49%

26.19%

39.70%

76.60%

CPB

10.20%

30.01%

39.69%

41.81%

 

At $51.53, Kraft is trading above all its averages.

50-Day   SMA

48.37

100-Day   SMA

46.82

200-Day   SMA

30.76

 

E = Earnings Have Been?          

We can’t determine a pattern for revenue or earnings yet.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

N/A

N/A

17.80

18.66

18.34

Diluted   EPS ($)

N/A

N/A

5.98

3.00

2.75

 

The same goes for quarterly earnings and revenue.

N/A

9/2011

12/2012

9/2012

12/2012

Revenue   ($)in   billions

N/A

4.47

5.03

4.61

4.49

Diluted   EPS ($)

N/A

0.70

0.54

0.79

0.15

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

Food costs have consistently increased, which have cut into profits throughout the industry. Competition is also fierce, especially in the form of price wars. However, this is still a profitable industry as a whole.

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Conclusion

Kraft is one of the strongest brand names in the United States. It’s now a smaller and more focused operation, which should be seen as a positive, not a negative. Cash flow is strong, margins are solid, and stock performance has been strong thus far.

Kraft is an OUTPERFORM.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.