Kraft Foods Meets Estimates

Kraft Foods Inc. (KFT - Analyst Report) posted fourth quarter 2010 operating EPS of 46 cents, in line with the Zacks Consensus Estimate and reflected strong gains from operations and lower taxes, which were offset by various factors. The quarter was primarily driven by strong volume-mix gains in each geography but could only manage the EPS to remain flat compared with year ago quarter.

Full year EPS increased 4.7% from last year to $2.02 but fell short by a penny of the full year Zacks Consensus Estimate.

Management credited the benefits of increased investments behind the Power Brands, strong productivity and disciplined cash management. Also the company is said to have been making good progress in capturing the synergies from the Cadbury acquisition. 

Highlights From The Quarter & Year

Revenues in the quarter soared 30% to $13.8 billion and included a 26.2 percentage point impact from the Cadbury acquisition, among other impacts. The revenue also moved ahead of the Zacks Consensus Revenue Estimate of $13.4 billion.

Revenue grew in each of the geographies with the the Developing Markets leading the race with an increase in revenue of 73.5%. It was followed by an increase of 28.6% in Europe and 12.2% in North America.

Full year 2010 net revenues increased 27.0% from prior year to $49.2 billion and surpassed the Zacks Consensus Revenue Estimate of $48.8 billion.

Favorable impact of 30.4 percentage points from Cadbury, which was partially offset by a negative 26.9 percentage points from the Integration and acquisition related costs, helped the operating income increase 2.2% on a year over year basis to $1.2 billion. Operating margin shed 240 basis points from last year quarter to 9%.

An impact of year-end tax legislation in 2010 and discrete items brought the tax rate to 23.2% versus 26.8% last year.

As on December 31, 2010, Kraft Foods had $2.48 million of cash and cash equivalents compared with $2.10 million at the end of year 2009.

The Way Forward

Kraft is stated to drive confidence from the belief of continuing strong business momentum in the challenging environment of weak consumer and category growth as well as significant input cost inflation.

The confidence is thus reflected in its 2011 outlook and the company expects to have an organic net revenue growth of at least 5%, or roughly 4% after excluding the impact of accounting calendar changes. Management expects the operating EPS growth in the range of 11-13%.

Zacks Consensus Estimate projects the EPS for next year to be $2.31 and revenue to be $51.8 billion.

Conclusion

Estimates for the quarter had been stable in the run-up to the earnings release, though one analyst gave a negative revision in the last one month. The full-year estimate for next year moved down by a penny to $2.31 per share over the past month, with 4 analysts revising negatively and only 1 analyst giving a positive revision.

We believe, over the past four to five quarters, the strong dollar and volatile commodity markets, especially dairy, had affected the top and bottom lines of the company. However, the company has implemented several turnaround plans to increase profitability, and revive organic growth.

The company has also strengthened its business model by increasing investments in promotion and marketing that increased its pricing power and improved product positioning. These initiatives are paying off now, and margins are improving.

Furthermore, the combination of Kraft Foods and Cadbury is expected to provide meaningful revenue synergies. The combined company expects long-term organic net revenue growth of more than 5%.

Peers for Kraft Foods include, Chiquita Brands International Inc. (CQB - Snapshot Report) and B&G Foods Inc. (BGS - Snapshot Report).

We currently have a Zacks #4 Rank for Kraft Foods, which translates into a Sell rating on short term basis. For long term we have a Neutral recommendation.

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