Kraft (KFT- Free Kraft Stock Report), the world's second-largest food company, has posted better-than-expected results for the second quarter. Indeed, share net of $0.62 for the period came in $0.06 ahead of our estimate, despite margin headwinds from higher input costs and a still-challenging consumer spending backdrop, particularly in the core North American market.
The upside was supported by an acceleration in continuing sales growth (to 7.1%, up from 4.6% during the March interim), a testament, we think, to the company's aggressive push into emerging countries, as well as its recent focus on marketing and innovation. Additionally, the pricing environment has improved markedly of late, which is enabling Kraft to more easily offset commodity inflation. And the company is benefiting from tight cost controls and hard-won gains on the productivity front.
In view of the strong operating trends in the second quarter, the company has raised its share-earnings outlook for 2011 by a nickel to “at least $2.25”. We are hiking our own estimate for the year by a $0.05 a share to match this bottom-line target, but we believe that management's guidance is on the conservative side, given the impressive continuing revenue growth that Kraft is now starting to generate.
Meanwhile, in other surprise news, Kraft has announced its intention to split into two separate companies in the form of a tax-free spinoff that is expected to be completed by the end of 2012. The first company will be its fast-growing global snacks business, which has annual sales of about $32 billion and includes the recognizable Oreo and Cadbury brands. The second will be the more mature, higher-margined North American grocery unit, with annual sales of roughly $16 billion, that includes the beverage, cheese, and convenient meals product lines.
This move seems to make sense, in light of the different strategies and growth profiles of the two entities. Specifically, when separated, Kraft should be better positioned to push the snacks unit deeper into emerging markets, and to invest in/expand its iconic North American grocery brands. Investors in the food industry will also have the option of putting their money into a growth company, or in a more conservatively managed one with solid cash flow and an attractive dividend payout. The markets, meanwhile, seemed to like the deal, perhaps reasoning that the sum of the parts may be worth more than the whole, as the stock rose to a new 52-week high following the news.
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 nearly half of the top-line mix, the food giant’s products are currently sold in more than 170 countries around the world. Among its more noteworthy acquisitions was the purchase of Nabisco in December of 2000 and Cadbury in February 2010.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.