Should You Buy Kraft Ahead of Earnings?

With shares of Kraft Foods Group (NASDAQ:KRFT) trading at around $51.49, 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

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Let’s get right to it on this one.

Positives:

  • Productivity improvements
  • Higher net pricing
  • International expansion potential
  • Analysts like the stock: 11 Buy, 10 Hold, 0 Sell
  • Cost savings
  • Brand loyalty
  • New product rollouts
  • 3.90 percent yield (higher than peers)
  • Kraft Macaroni & Cheese revenue increased 11 percent year-over-year
  • Velveeta revenue increased 12 percent year-over-year
  • MiO seeing strong sales
  • Strong cash flow
  • Plans to reduce overhead

Negatives:

  • Poor debt management
  • Advertising costs increased 20 percent last year
  • Volume declines
  • Cautious management
  • Increased marketing expenses likely in future due to new product rollouts
  • Decline in revenue in 2012
  • Decline in earnings in 2012

For those who enjoy reading content in paragraph form, fear not, this classic form of writing will be offered in other sections (to a certain extent).

Now let’s take a look at some comparative numbers. The chart below compares fundamentals for Kraft, ConAgra Foods (NYSE:CAG), and Campbell Soup Company (NYSE:CPB). Kraft has a market cap of $30.40 billion, ConAgra has a market cap of $14.73 billion, and Campbell Soup has a market cap of $14.57 billion.

KRFT

CAG

CPB

Trailing   P/E

18.63

29.53

19.85

Forward   P/E

16.37

14.18

17.11

Profit   Margin

8.95%

3.48%

9.12%

ROE

16.29%

9.87%

62.08%

Operating   Cash Flow

$3.04 Billion

 $1.05 Billion

 $1.14 Billion

Dividend   Yield

3.90%

2.80%

2.50%

Short   Position

1.10%

1.50%

7.90%

 

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 much weaker than the industry average of 0.80. Poor debt management is the biggest weakness for Kraft. Looking ahead, an argument can be made for both sides here. On the optimistic side, Kraft will have enough cash to pay down debt. On the pessimistic side, debt will be a major drag, which will potentially lead to the dividend being cut.

Debt-To-Equity

Cash

Long-Term Debt

KRFT

2.79

$1.26 Billion

$9.97 Billion

CAG

2.07

$723.80 Million

$10.68 Billion

CPB

3.90

$416.00 Million

$4.51 Billion

 

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T = Technicals Are Strong    

Kraft hasn’t been around long since the spinoff. Therefore, it’s difficult to determine performance. However, in the brief time it has been trading it has performed well.

1 Month

Year-To-Date

1 Year

3 Year

KRFT

-0.10%

14.33%

N/A

N/A

CAG

-0.53%

21.68%

39.90%

58.36%

CPB

2.28%

32.98%

41.66%

43.54%

 

At $51.49, Kraft is trading above all its averages.

50-Day   SMA

50.19

100-Day   SMA

48.19

200-Day   SMA

36.14

 

E = Earnings Have Been?                     

We don’t have enough information to rate earnings performance. Kraft is still too new since the spinoff.

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

 

 

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   billions

5.04

4.45

4.79

4.61

4.49

Diluted   EPS ($)

N/A

N/A

N/A

0.79

0.17

 

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

The bad news is that costs have been high. Using a compound annual growth rate (CAGR) over the past three years, the cost of milk has increased 4 percent, the cost of beef has increased 6 percent, the cost of coffee has increased 15 percent, and the cost of chicken has increased 5 percent. This has led to a great deal of frustration throughout the industry. However, an ironic situation is likely to present itself in the future. It’s one of those “be careful what you wish for” situations. Eventually, our country’s massive government and private debts must be paid off, monetary stimulus must slow (or have less effect), and interest rates must increase. This will lead to a deflationary environment. The good news is that costs will come down for just about everything, including gas and food. The bad news is that demand will also fall.

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Conclusion

Apologies are in order, as no attempt will be made to predict earnings. Investors should consider waiting to see what happens and then plan accordingly. Listening carefully to management will often provide a good indication on where the company is headed. By not getting involved prior to earnings, investors might miss some upside potential, but it’s not worth the risk. This is a dividend play anyway; there is no sense in taking unnecessary risks. The generous yield will be in place either way.

Kraft is a WAIT AND SEE.

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.

Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I do not have a position in this stock. I am currently short technology, financials, the Russell 2000, and the euro.

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