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Kraft Foods Group, Inc. (NASDAQ:KRFT) has managed to beat the analysts' expectations in the first quarter and delivered the earnings surprise of 18.80%. This performance was attributed to gains in productivity, innovation and overhead savings. However, I believe that it would be difficult for KFRT to continue this performance throughout the year because its business is primarily concentrated in U.S. and Canadian markets. These markets are very price competitive and with upcoming private labels the future seemed to be tough. Moreover, the company's profits are very much linked to the commodity prices which can make its performance volatile.

After the spin-off, KRFT can finally focus on its needs, which were apparently different from its other business segment (Mondelez International, Inc. (NASDAQ:MDLZ). The two major driving forces for the $19 billion company was the chance to expand its profit margins and innovation.

The table below shows the margins of KRFT and its major competitors. As shown in table, there is no significant difference in the margins, which means that expansions in margins have been achieved. If we compare it with the average of its competitors, KRFT margins are higher, which means the company has been able to manage its cost effectively and anymore expansion in margins will be somewhat difficult.

Companies

Profit Margin

Operating Margin

HSY

10.45%

18.53%

K

6.30%

11.41%

GIS

10.41%

16.78%

KRFT

8.76%

16.14%

Source: Yahoo Finance

KRFT has been able to make significant progress in the innovating new products and it has managed to establish several new brands in the market like MiO energy liquid water enhancer, Philadelphia indulgence spreads, Oscar Mayer etc. It will also continue to be a major driving force to overcome the competition and losses incurred from product-line pruning. The table below shows the net revenue from new product innovation over the period of four years. Another encouraging sign is that the cost savings are directed toward advertising expenses, which were relatively lower than its competitors' expenses.

Years

Net revenue from new product innovation

2009

6.5%

2010

7.8%

2011

10.4%

2012

13%

Source: CAGE Conference Presentation

Key Highlights of Financial Performance of 1Q'13

Increase in net revenue was of 2.1% with contribution from volume/mix and price 2.4% and (0.3%) respectively. Operating profit experienced a tremendous growth rate of 9.2%. It was the result of enhance productivity, product and volume mix and reducing overhead costs. Free cash flows and earnings per share is well in line to meet 2013 guidance of the company. Earnings per share and free cash flows were at $ 0.76 per share and $147 million per share.

Valuation

I also believe that KRFT is overvalued and it is trading at a premium as we take an average of the price of the bullish and bearish case, which comes out to be around 51.70.

Average P/E

High/Low Earnings Estimates

Price

16.6x

2.90

48.14

16.6x

3.33

55.27

Conclusion

KRFT offers attractive dividend yield of 3.60%, which is highest among its competitors. I believe that the company has limited upside potential in terms of price appreciation but it has a stable dividend payout. So, KRFT still paints an encouraging outlook for investors looking for stable cash flows in this sector; otherwise the stock doesn't seem to be attractive.

Source: Kraft: Attractive Dividend Yield With Low Growth Prospects