On Sep 27, we maintained a Neutral recommendation on
Kraft Foods Group, Inc.
) following mixed second-quarter results.
Why the Neutral Recommendation?
On Aug 1, 2013, Kraft Foods announced mixed second-quarter
2013 results beating the Zacks Consensus Estimate for earnings
but missing the same for revenues.
Second-quarter adjusted earnings of 85 cents per share
declined 22% year over year due to weak top line, lower profits
and high interest expense. Adjusted earnings, however, beat the
Zacks Consensus Estimate of 67 cents by 26.9%. We believe that
Kraft's higher-than-expected productivity savings contributed to
the earnings beat.
However, sales declined 1.1% and also missed the Zacks
Consensus Estimate due to lower volume and pricing, and headwinds
from an early Easter and product pruning. Adjusted operating
income also declined almost 10% as strong productivity gains and
cost savings were offset by higher marketing expenses and
Moreover, Kraft lowered its full year 2013 organic revenue
guidance due to soft revenues in the second quarter.
Encouragingly, however, accelerated advertising investments are
expected to drive sales in the second half.
Overall, we are encouraged by Kraft's aggressive
cost-reduction and efficiency-improvement initiatives which will
provide more cash to invest in innovation, brand building and
marketing initiatives. Kraft Foods also aims to maximize cash
flows which will be used to pay strong and competitive
However, despite Kraft's cost-saving efforts consistently
boosting earnings, it needs to show sustained improvement in the
top line. Moreover, increasing competitive pressures, challenging
industry conditions and a lack of exposure outside the U.S. keep
us on the sidelines.
Other Stocks to Consider
Kraft carries a Zacks Rank #3 (Hold). Other stocks in the food
industry that are currently performing well and have a bright
Pinnacle Foods Inc.
Green Mountain Coffee Roasters, Inc
Treehouse Foods, Inc.
). While PF and GMCR carry a Zacks Rank #1 (Strong Buy), THS
carries a Zacks Rank #2 (Buy).
GREEN MTN COFFE (GMCR): Free Stock Analysis
KRAFT FOODS GRP (KRFT): Free Stock Analysis
PINNACLE FOODS (PF): Free Stock Analysis
TREEHOUSE FOODS (THS): Free Stock Analysis
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