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Dow 30 Profile: Kraft Foods Inc.
Kraft Foods (KFT - Free Kraft Stock Report), a component of the 30-stock Dow Jones Industrial Average since September of 2008, is the largest food manufacturer in the United States and the second-largest in the world behind Swiss giant Nestle. The company, with annual sales approaching $50 billion, and a presence in roughly 160 countries, owns some of the most valuable, recognized consumer brands on the planet. In fact, it markets 11 brands with revenues exceeding $1 billion, including Kraft, Jacobs, LU, Maxwell House, Cadbury, Trident, Milka, Nabisco, Oreo, Philadelphia, and Oscar Mayer.
A Long And Complex History
The company’s corporate history, dating back more than 100 years, reads like an intricate family tree, with not one but many roots. Indeed, the story of Kraft is really the tale of the consolidation movement across the U.S. food processing industry during the late 19th and 20th centuries. From the beginning, the largest pieces of the puzzle were James L. Kraft’s wholesale cheese business (started in 1903); C.W. Post’s cereal outfit (founded in 1895 and later incorporated as General Foods Corporation); and Oscar Mayer’s meat operations (begun in 1883).
These three iconic units eventually merged after years of doing business as independent entities. In 1981, Oscar Mayer was gobbled up by General Foods Corporation, which, four years later, was itself acquired by Altria Group (MO), formerly Philip Morris Companies, a multinational conglomerate best known for its extensive tobacco operations. Then, a few years after that, in the 1989 time frame, Altria purchased Kraft for $12.9 billion, and integrated Kraft into its General Foods division.
The consolidation wave, aimed at generating cost savings and huge scale advantages, continued into the new millennium. In 2000, Altria bought Nabisco Holdings, maker of Oreo cookies and Ritz crackers, for $18.9 billion. It merged the company with its Kraft Foods unit (that name was adopted in 1995; it was known as Kraft General Foods previously), creating one of the world’s most profitable food enterprises.
Separation From Altria
In 2001, Kraft became a public company again, when Altria sold 280 million Kraft shares via an initial public offering. Altria retained a super-majority (over 88%) interest in the company until early 2007, however. At that time, it distributed the remaining Kraft stake to its shareholders in a tax-free transaction.
Today, Kraft maintains one of the most diverse product portfolios of any domestic packaged food manufacturer. Since its separation from Altria, it has stayed true to its roots, remaining very active on the acquisition front, in search of greater economies of scale and more access to the world’s booming markets, particularly in the Asia/Pacific region. In 2007, shortly after the separation was completed, Kraft purchased Groupe Danone’s global biscuit business, and agreed to sell its cereal unit to Ralcorp Holdings (RAH) for $2.6 billion.
The Cadbury Deal
Most recently, in February of 2010, Kraft engineered one of the more daring mergers in its storied history. After a lengthy, cross-Atlantic tug of war, it acquired Cadbury, the famed British confectioner, for around $20 billion in stock and cash. The transaction creates numerous new synergy opportunities for Kraft, which now appears poised to increase its top line at a quicker pace (about 5%) than the overall food industry in the years to come.
In particular, on the revenue side, the company will likely benefit from higher exposure to some of the faster-growing merchandise categories in the food space (e.g., confection, snacks, and gum), and from a greater presence in emerging international countries, like China and India, where Cadbury has already invested a lot in marketing and distribution. (Emerging markets currently account for one-quarter of the top-line mix.) Cost savings related to the deal ought to be ample, too, given the larger scale of the new Kraft and the companies’ overlapping back-office functions and facilities. In fact, the merger is expected to produce at least $750 million in cost synergies when the multiyear integration process is finished.
The Cadbury-related savings, coupled with productivity gains and restructuring benefits, should help to offset an uptick in commodity prices as the decade progresses. Though input costs have been generally favorable of late, inflation and better economic times will probably lead to higher prices for key commodities, such as cheese, coffee, and meats.
Kraft increased its financial leverage to consummate the blockbuster Cadbury deal. But debt levels remain quite reasonable by industry standards. Moreover, free cash flow remains plentiful, which is supporting an above-average dividend payout and management’s efforts to deleverage the balance sheet (and bring down interest payments).
In sum, Kraft is a well-managed packaged food outfit, nicely positioned to capitalize on cost savings opportunities, and on its participation in attractive product categories and emerging markets across the globe. The giant corporation’s quality management team, sound finances, and healthy dividend yield also render this Dow component a fine choice for conservative accounts.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.