Kraft (KFT – Free Kraft Stock Report), the largest food manufacturer in the United States and the second-largest worldwide (behind Nestle), has reported strong third-quarter results. Indeed, share net of $0.58 came in $0.03 ahead of our estimate and more than 20% above the year-earlier mark, despite significant cost inflation, higher expenses at the corporate level, and a challenging consumer spending backdrop in the core North American market. The upside was supported by an acceleration in internal sales growth, to 8.4%, as the company was helped by gains on the pricing front, market-share advances at home, and strong demand in developing countries. Good cost containment and a favorable tax rate were also pluses, and Kraft shares rose modestly on the news.

Looking ahead, management has raised its full-year guidance for organic revenue growth to “at least 6%”, up from earlier expectations of “at least 5%”. Nonetheless, we still forecast share net for the year to be $2.30 (we have reduced our fourth-quarter estimate from $0.61, to $0.58), due to a likely uptick in commodity costs that are squeezing profits throughout the packaged food space. These expense pressures should partially offset ongoing cost-management initiatives and efforts to garner synergies from the recent Lu and Cadbury acquisitions.

In 2012, we see the bottom line climbing at another solid double-digit clip, to the $2.60-a-share mark. While commodity headwinds ought to remain stiff, the current sales momentum should persist, as the company's international business comes more into focus. The overseas unit, which got a big shot in the arm when Kraft purchased British confectioner Cadbury, is driving the lion's share of the top-line growth these days. And we see this trend continuing well into the future, given the vast opportunities to leverage the company's candy and snack brands in the BRIC countries (i.e., Brazil, Russia, India, and China).

The strong overseas growth, which does not appear to be reflected in the stock price (these shares continue to trade at a rather pedestrian P/E multiple in line with the broader market), is one reason why Kraft is attempting to enhance shareholder value by splitting into two separate companies by the end of 2012. The first company will encompass the fast-growing global snacks operation, while the second will be made up of the more mature North American grocery division.

We continue to like this Dow-30 component for income-oriented accounts, or for investors seeking a relatively stable food stock to round out their equity portfolios. Holding the blue chip through the planned spinoff should prove especially rewarding, though we've yet to factor the separation into our earnings model.

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.