Here is a look at how Kraft Food Group (KRFT) fares in ModernGraham's opinion, based on an updated and modernized version of Benjamin Graham's requirements of defensive and enterprising investors from The Intelligent Investor:
Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):
Defensive Investor - must pass at least 6 of the following 7 tests: Score = 1/7
- Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
- Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
- Earnings Stability - positive earnings per share for at least 10 straight years - FAIL
- Dividend Record - has paid a dividend for at least 10 straight years - FAIL
- Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - FAIL
- Moderate PEmg ratio - PEmg is less than 20 - FAIL
- Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL
Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
- Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - FAIL
- Earnings Stability - positive earnings per share for at least 5 years - FAIL
- Dividend Record - currently pays a dividend - PASS
- Earnings growth - EPSmg greater than 5 years ago - PASS
Valuation Summary (Explanation of the ModernGraham Valuation Model)
|Value Based on 3% Growth||$27.79|
|Value Based on 0% Growth||$16.29|
|Market Implied Growth Rate||10.04%|
|Net Current Asset Value (NCAV)||-$22.54|
Balance Sheet - 9/30/2013
Earnings Per Share
Earnings Per Share - ModernGraham
Kraft Foods completed a spin-off of its North American business, naming the North American business Kraft Foods Group. This newly formed company is what we are analyzing here, and as a result of its short operating history, there is ample possibility for speculating. It is important to note that while many would attempt to analyze Kraft Foods Group using data from before the spin-off, this is a difficult process because of the speculation that may present itself when doing so (i.e. how would the company have done in 2009 if it were a stand-alone operation?). Since avoiding speculation is one of the 7 Key Tips to Value Investing, we only review the data attributable to Kraft Foods Group since the spin-off, as if it were a brand new start-up.
As a result, Kraft Foods Group does not qualify for the Defensive Investor or the Enterprising Investor because of its short history. The Defensive Investor requires a ten-year operating history while the Enterprising Investor strongly prefers a five-year operating history (this requirement can be overlooked if the company's debt is low compared to current assets, but that is not the case here). It should be noted that even if investors utilize data from prior to the spin-off, the company would still not qualify for the Defensive Investor because of its high PB ratio and low current ratio. As for a valuation, the ModernGraham valuation model will not make an estimate for growth based on such a short time frame, so we are left with using either the value based on 3% growth or the net current asset value. Under either approach, the company would appear to be overvalued.
What do you think? What value would you put on Kraft Foods Group? Is the company not suitable for Defensive Investors or Enterprising Investors? Is there a company you like better?
Disclosure: The author did not hold a position in Kraft Foods Group (KRFT) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.