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Kraft Foods (NASDAQ:KRFT) operates in a mature and competitive North American food and beverage industry. The company has remained a popular investment option for dividend-seeking investors, as it offers a 4% dividend yield. Since its spin-off last year, the company has been struggling to expand its volumes and margins. A highly competitive industry and soft consumer spending have remained headwinds for the company's revenue growth in recent times. I believe KRFT will continue to face sluggish volume growth and productivity enhancing efforts will remain an important growth driver. I believe the stock is fairly valued, and there is limited upside price potential at current valuations.

KRFT is the leading company in the North American food and beverage industry. The company has recently been struggling to grow its volumes, revenues and margins due to a highly competitive environment and soft consumer spending. In 3Q2013, KRFT registered a 4.1% decline in organic revenues, due to a 3.1% decrease in sales volume and a 1% decrease in pricing. Despite the decrease in organic revenues of 3Q2013, KRFT was able to expand its EPS by 5% year-on-year to $0.83. Earnings for the quarter were positively affected by an almost 23% reduction in selling, general and administration expenses. The following table shows the breakdown of KRFT's organic revenues according to its product categories for 3Q2013.


(Click to enlarge)

Source: Quarterly Report

Despite the fact that KRFT is the leading company in the industry with a dominant market position, the company has been facing challenges to increase its revenues and volume. Due to a soft consumer spending environment, private label brands have gained popularity and have been eating up the market shares of large companies like KRFT. I believe the company has to push hard with its promotional spending to drive up its sales volume and revenues. I believe the company might be able to increase its sales volume, but pricing is likely to remain weak in the near term due to the tough industry environment. The following table shows sales volume and pricing increase trends for KRFT in the recent past.

FY2012

1Q2013

2Q2013

3Q2013

Volumes

(3%)

2.3%

(0.9%)

(3.1%)

Pricing

3%

0%

(0.3%)

(1%)

Source: Company Reports

KRFT has lower margins in comparison to its competitors, and the company intends to enhance productivity to increase margins. However, the recent financial performance suggests that the company has been unsuccessful in consistently increasing its margins in the prevalent tough industry conditions. I will recommend investors to keep an eye on KRFT's margins; if the company is able to consistently increase its margins, it will portent well for the stock price. The table below shows gross and operating margin trends for KRFT.

1Q2013

2Q2013

3Q2013

Gross Margin

33.5%

34%

32%

Operating Margin

17.8%

16.8%

15.8%

Source: Company Reports

Price Target

Average P/E of KRFT

KRFT - Estimated EPS 2014

Price Target

16.8x

Bull Case = $3.26

$55

16.8x

Base Case = $3.16

$53

16.8x

Bear Case = $2.9

$48.5

Source: Nasdaq.com and Calculations

At current valuations, the stock is fairly valued and according to my base case scenario, I reach a price target of $53, at which the stock offers limited price appreciation.

Conclusion

KRFT has a dominant market position within the industry, however, the tough industry conditions have made it difficult for KRFT to increase its sales volume, revenues and margins. I recommend investors to look for any increase in sales volume and margins, which will portent well for the stock price.

KRFT currently has a higher PEG of 2.95, which reflects that it offers expensive growth compared to its competitors, and a lower next five years growth rate of 6.4% among its competitors, as shown in the table below. However, KRFT has a high dividend yield of 4%, which makes it attractive for dividend-seeking investors.

PEG

Next 5 Year Growth Rate

Dividend Yield

KRFT

2.95

6.4%

4%

ConAgra Foods (NYSE:CAG)

1.6

8.7%

3.1%

Kellogg (NYSE:K)

2.3

7%

2.9%

Source: Yahoo Finance

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.

Source: Kraft Faces Uncertain Future Over Volume Blues