How Will Cost Saving Help Grow Kraft

| About: The Kraft (KHC)

Due to the fall in its topline, Kraft Foods (KRFT) is implementing various cost saving initiatives to improve its operating income. The company will lay off workers from its plant in Mason City. The management of this plant expects to re-evaluate its staff situation in the first quarter of next year.

Kraft Foods also plans to close its Canada bakery division. Canada is a vital segment of the company, as it accounted for around 10.83% of Kraft Foods' net sales in the third quarter of fiscal year 2013. Besides this bakery division, the company is also expected to close its Oakville coffee plant in the country. In the third quarter of fiscal year 2013, operating income from Canada increased 7.6% year over year to $85 million.

During the nine months ending in September 2013, Kraft Foods' operating margin increased from 17.48% to 22.58% year over year. Growth was also observed in the third quarter of fiscal year 2013. The growth in the operating margin suggests that the company's cost reduction plan is moving on right track. Going forward, I feel that the cost saving initiatives of Kraft Foods will further increase its operating margins.



Time period

Third quarter, fiscal year 2013

Third quarter, fiscal year 2012

Nine months ending September 28, 2013

Nine months ending September 28, 2012

Operating income (in $ million)





Net revenue (in $ million)





Operating margin (in %)





Click to enlarge

Another company that is cost cutting is Kellogg (NYSE:K). It is expected to cut around 7% of its global workforce, or approximately 2,000 jobs. The company will slash these jobs as part of its four year cost saving plan. Under this plan, known as "Project K," Kellogg is also expected to consolidate its supply chain structure and is expected to save between $425 million - $475 million annually. Kellogg will use these savings to develop its operations in emerging markets and its core segment, cereals.

Additionally, Kellogg expects to fetch investors' attention with its dividend. On October 25, 2013, Kellogg declared a dividend of $0.46 per share, payable on December 16, 2013. This dividend marks the 356th regular dividend being paid by the company and proves that Kellogg has strong cash and cash equivalents, utilized to pay dividends for a long time.

Besides growing fundamentally, Kellogg's valuation also supports the stock. The company's price to earnings, or PE, ratio is 22.84, which is higher than its forward PE ratio of 15.33. Kellogg's trailing PE ratio is also lower than the industry's trailing PE ratio of 25.9. Its price to sales, or P/S, ratio is 1.51x, higher than the industry's figure of 0.79x. However, going forward, the P/S ratio of the company is expected to be 1.49x, lower than the industry's ratio of 2.3x. The return on equity, or ROE, of Kellogg is 37.6%, which is higher than the industry's ROE of 16%. All the valuation factors and growth fundamentals promt me to take a bullish position on Kellogg.

Kraft Foods also declared a growth of 5% in its dividend to $0.525 per share, paid on October 25, 2013. This is the first dividend hike the company has declared after it became an independent company last year. Mondelez International (NASDAQ:MDLZ) spun off Kraft Foods, making it an independent entity. In the long term, free cash flow is expected to be around 85% of the company's net income, and will be used to pay regular and incremental dividends. This is a positive sign for those investors who are looking for a steadily growing stream of income.

Coffee booster

In a bid to boost its beverage segment, Kraft Foods is teaming up with McDonald's (NYSE:MCD) to test McCafe coffees in supermarkets and other retail outlets in the U.S. The test is expected to commence next year. Test markets will receive McCafe beverages in new formats including roasted and ground bag coffee as well as a 'single cup' option. Though the cost of McCafe coffee is still not disclosed, McDonald's began selling this coffee in Canada at some of its outlets last year at a cost of $7 per cup.

Kraft Foods' presence in the coffee market isn't new; the company started selling 'Gevalia' coffee to supermarkets, which grew its beverage segment in 2011. With the addition of McCafe, Kraft Foods' beverage line will further enhance. In the third quarter of fiscal year 2013, Kraft Foods' beverage segment accounted for around 14.22% of the company's net revenue, and its beverage segment's revenue declined 8% year over year to $625 million in the third quarter. I expect that partnering with McDonald's and the above discussed cost saving measures will reverse this decline in the future.

Coffee is one of the fastest growing beverages in its global drinks business. Since 2009, its coffee sales have surged 70%. McDonald's has less than 13% of the share in the U.S. coffee market and considers it less than a 'fair share' of the market. Currently, coffee accounts for 6% of the company's total sales. With respect to the above discussed partnership, I expect that the company's market share in the U.S. will further increase and its revenue contribution will also increase.


Kraft grew its operating income in the third quarter of fiscal year 2013, owing to its cost saving measures. I expect that this growth trend will continue in the future. Kraft Foods is also betting on the growth prospects of its beverage segment. I feel these aspects will pave a growth path for the company in the long run, so investors can include this stock in their portfolio for comfortable returns.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.