Kraft (KFT - Free Kraft Stock Report), the second-largest food manufacturer in the world (behind Nestle), has reported mixed fourth-quarter results. Continuing revenue growth for 2010's final period was quite strong, at nearly 6%, thanks to big volume advances in emerging markets, particularly in China and other parts of the Asia/Pacific region. But the Cadbury operations, acquired roughly a year ago, performed unevenly (with sluggish sales in both North America and Europe), as inventories remained unusually high, and new advertising and product-development initiatives failed to gain much traction. What's more, cost inflation hampered profit margins, offsetting cost-reduction efforts and Cadbury-related synergies. This caused share earnings of $0.46 for the quarter to miss our estimate by a penny.

Looking ahead, Kraft issued somewhat cautious guidance for 2011, which prompted some jittery investors to head for the exits. (The stock traded down about 2% immediately after the earnings announcement.) Indeed, the company now expects share net in the year ahead to rise 11%-13%, rather than at a rate in the mid-teens, as many on Wall Street had expected. This conservative forecast reflects management's belief that rising input costs, for everything from cheese and coffee to corn and wheat, will continue to weigh heavily on the bottom line. Plus, strategic price hikes needed to counteract the commodity headwinds will likely have a negative impact on volume trends, as more strapped consumers switch from Kraft products to private-label goods.

In light of the commodity concerns, we are reducing our earnings call for 2011 by a dime, to $2.25 a share. We still like this high-quality Dow component as a long-term play, however, especially for investors looking for dividend income and a comparatively low-risk place to put their money. Over the next 3 to 5 years, we expect the consumer spending environment to improve and commodity pressures to ease. And Kraft should realize the full benefits of the Cadbury deal, including considerable cost savings and an acceleration in sustainable revenue growth.

About The Company: Kraft Foods is the largest branded food and beverage company headquartered in the United States and the second-largest worldwide. The company markets many of the world’s leading food brands including Kraft cheese, Maxwell House coffee, Nabisco cookies and crackers, Philadelphia cream cheese, Oscar Mayer meats, and Post cereals. While North America accounts for approximately 45% of sales, the food giant’s products are currently sold in more than 160 countries around the world. Among its more noteworthy acquisitions was the purchase of Nabisco in December of 2000 and Cadbury in February 2010. 

* This report includes late-breaking news not reflected in our full-page review of this company.


At the time of this article’s writing, the author did not have positions in any of the companies mentioned.