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Kraft Foods (KFTFree Kraft Stock Report), the biggest food manufacturer in the United States and the world's second largest behind Nestle (NSRGY), has gotten off to a solid start this year. In fact, first-quarter share net of $0.57 came in $0.03 ahead of our estimate and $0.01 above Wall Street's consensus view, as the company continued to perform well in a challenging environment, one made chilly by considerable commodity cost inflation, and one in which many domestic packaged-food outfits are struggling. Helped by these results, stable Kraft shares are trading just marginally lower today in a decidedly weaker equity market.

The earnings upside was supported by strong organic revenue growth (+6.5%), particularly in emerging international markets, where Kraft continues to build out its infrastructure and garner benefits from its 2010 acquisition of British confectioner Cadbury. Additionally, the European operations showed surprising strength (internal growth there was 7.2%), despite the widespread sovereign-debt crisis that is still plaguing much of the euro zone. And the company succeeded, to a large extent, in offsetting the commodity cost pressures with strategic price hikes. This is a testament, we think, to Kraft's past marketing efforts aimed at shoring up its core brands.

Looking ahead, we expect organic revenue growth to track in the mid-single digits for the remainder of the year and into 2013. This would be pretty impressive, in our opinion, given the still-tough business climate and the headwinds on the U.S. unit from SKU rationalization initiatives. Commodity headwinds, meanwhile, are likely to ease going forward. And Kraft is set to realize incremental cost synergies related to its purchases of Cadbury and Lu. (Biscuit maker Lu was acquired in 2007 from Danone for $7.7 billion.) All in all, while profits are being squeezed throughout the sector, we are maintaining our earnings estimates and see share net rising 9% in 2012 (to $2.50) and another 10% next year (to $2.75).

These earnings prospects are starting to be reflected in the stock price, which is now near its 52-week high. Nonetheless, in the hopes of further enhancing shareholder value, Kraft is moving ahead with plans to split into two separate public companies by year's end. The first entity would consist of the fasting-growing global snacks business, and the second would encompass the more mature, but higher-margined, domestic grocery operations. The split is scheduled to take the form of a tax-free distribution of shares to stockholders.

We continue to recommend this high quality Dow-30 component to conservative investors. It offers an above-average dividend yield, and the current share price, we think, represents an attractive entry point into the two companies that are set to be created later this year.

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 accounted for 46% of the top-line mix in 2011, 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.