We have initiated coverage on
Kraft Foods Group, Inc
. (
KRFT
) with a Neutral recommendation and a target price of $48.00.
Headquartered in Northfield, IL, Kraft Foods Group was spun
off from Kraft Foods, Inc into a separate independent company on
October 1. Kraft Foods Group consists of the North American
grocery business of the old Kraft Foods. The old Kraft Foods has
been renamed to
Mondelez International, Inc.
(
MDLZ
) and now comprises only its global snacks business.
Kraft Foods Group is one of the largest consumer packaged food
and beverage companies in North America. Its sells branded
products in beverages, cheese, coffee, refrigerated meals and
grocery categories, mainly across U.S. and Canada. A dozen of its
brands are more than 100 years old, ten of which generate
revenues in excess of $500 million. These include Maxwell House
coffees; Philadelphia cream cheeses; Kraft cheeses, dinners and
dressings; Oscar Mayer meats and many more.
Kraft is trying to improve its long-term results by focusing
on cost savings, brand support via strong advertising, and cash
generation.
Management's strategy is to re-invest half of its savings on
brand building and innovation and return the other half to
shareholders in the form of dividends. The company is refreshing
brand portfolio through product innovation, creating new sub
categories (for example it created the liquid concentrate
category with its Mio water enhancer) and also remodeling
products according to the demand of the untapped growth segments
(like the Hispanic population in North America).
Further, Kraft aims to differentiate its brands through
investment in quality upgrades of brands, promotions and
marketing investments. These brand building and advertising
investments are winning customers for the company around the
world and simultaneously driving revenue and profits higher.
These initiatives have enabled Kraft to enjoy more pricing power
and improve product positioning against lower-priced private
label brands. The company has been able to successfully
incorporate price increases despite rising commodity costs and
advertising spends, while also maintaining positive volume growth
and gaining market share.
Kraft is aggressively reducing costs and improving
efficiencies under its 2012-14 restructuring program. As part of
this program, the company is reducing overhead expenses, managing
labor costs, outsourcing distribution, reducing IT spends,
simplifying the supply chain and increasing capacity utilization.
Moreover, the company is undergoing a firm-wide culture change
and re-aligning compensation plans. Management is targeting net
productivity savings of 2.5% annually from its efforts that will
provide more cash to invest in its brand building, innovation and
marketing initiatives and also pay back to shareholders.
Further, Kraft aims to generate significant cash and is
targeting to "put dollars in shareholders' pockets, not margins.
The free cash flow of this company will be used mainly to pay
steady and incremental dividends that are targeted to grow
consistently in the mid-single digit range.
Despite the positives, challenging industry conditions, rising
commodity inflation and a lack of exposure outside U.S. keep us
on the sidelines. Though food and beverage is one of the most
attractive and largely profitable markets in the world, it is
also the most challenging and has seen sluggish growth and
slowdown in consumption over the last few quarters. Further,
Kraft's business is squarely focused on North America. Thus,
unlike some of its peers, Kraft lacks exposure to the growth
prospects of some fast growing emerging markets to offset
headwinds from weak developed markets. Moreover, Kraft's
commodity costs, on average have increased by over 35% in the
past five years versus the prior five. The commodity cost
volatility and higher cost environment are expected to continue
over the remainder of the year.
KRAFT FOODS GRP (KRFT): Free Stock Analysis
Report
MONDELEZ INTL (MDLZ): Free Stock Analysis
Report
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