Kraft Foods: Progress In Achieving Long-Term Goals Key Highlight Of Bullish Stance

| About: The Kraft (KHC)

Kraft Foods (KRFT) continues to work on its efforts to reshape operations and drive earnings growth. The company has been targeting margin expansion to support its earnings growth. Also, KRFT has been pumping up its advertisement spending to increase sales volume in the competitive business environment. Last year, 2013, has been a good year for the company, as it managed to maintain and grow its market share. Also, the stock offers a solid dividend yield of 3.80%, backed by strong cash flows, making it a good investment choice for dividend investors. Therefore, I am bullish on the stock.

Financial Performance

The company reported satisfactory financial performance for 4Q2013 and full year 2013. KRFT reported adjusted earnings of $0.43 per share, up from $0.41 in the corresponding period last year. Including the impact of post-employment benefit, reported earnings showed a sharp increase, from being $0.15 per share in 4Q2012 to $1.54 per share in the recent fourth quarter. Revenues for 4Q2013 came out to be $4.60 billion, up more than 2% year-on-year. A positive takeaway from the recent quarter's earnings was the fact that the company was able to increase its organic revenues in the recent fourth quarter by 3.2%, outperforming the organic revenue growth of 0.6% for the North American food and beverage industry. Also, sales volume for the company stayed strong in the fourth quarter, despite the challenging industry conditions; sales volume for KRFT increased 4% in the quarter, as compared to a 3.1% sales volume decline in 4Q2012. I believe sales volume for the quarter was positively affected by an increase in advertisement spending and a 0.8% drop in net pricing.

The company did not provide any specific guidance for the ongoing year, 2014. However, it expects sales and earnings growth to be consistent with long-term growth targets. KRFT expects its long-term organic net revenue growth to be in line or above industry growth. And operating income and EPS growth is expected to be in mid-single digits and mid-to-high single digits, respectively, in the long term. Also, as the free cash flow generation for the company remains strong, KRFT expects long-term free cash flow generation to be at least 90% of net income.

Kraft Making Progress

Since KRFT's spin-off, more than a year ago, it has been creating efforts to improve its cost structure, target product innovation and strengthen its market share. The company has been making healthy progress in achieving its long-term targets. As the company's advertisement spending remains below the average of its competitors, KRFT has been pumping up its advertisement spending, which will portend well for the sales volume. Advertisement-to-sales spending for KRFT increased to 4% in 2013, up from 3.5% in 2012. The company has planned to expand its advertisement-to-sales spending to 5% in the long term. I believe increasing advertisement spending is an important stock price driver as it will benefit sales volume in the competitive industry environment. Also, the company has an attractive long-term margin expansion opportunity, as current margins for KRFT remain below its industry average. The company is aiming for a 5% gross productivity improvement. In 2013, KRFT has managed to lower its overhead costs by approximately 1% of total sales as compared to 2012.

A solid product portfolio and product innovation also remain KRFT's strengths. The company has been dominating (No. 1 or 2) positions in products that generate approximately 80% of its total revenues. The company recently announced to offer more healthy products, focusing more on proteins and fresh ingredients, consistent with changing consumer needs. Also, the company is aiming to penetrate the club and dollar store format. KRFT's efforts at product innovation stand as being very important for the stock price performance in the future. In 2013, the contribution from new product increased to 14% as a percentage of total sales. Also, in 2013, the company was able to maintain or increase its market share in 66% of product categories/offerings, as compared to only 40% in 2012.

Moreover, I believe the stock is a good investment option for dividend investors, as it offers a solid dividend yield of 3.8%. Dividends offered by KRFT are sustainable, as they are backed by strong cash flows. The company generated strong free cash flows of $1.5 billion in 2013. Free cash flow generation for KRFT is likely to improve further in 2014, due to lower pension contribution; the company only allocated $200 million to pension plans, as compared to $600 million in 2013. Also, the restructuring spending is expected to drop in 2014, which will strengthen free cash flows for the company. An improvement in free cash for KRFT could result in dividend increases or/and share repurchases in 2014, which will portend well for the stock price.


KRFT has been making progress towards its long term targets, which is evident from its recent cost saving efforts, solid free cash flow generation and strong market share. Attractive margin expansion opportunities and increasing advertisement spending are likely to benefit the company's future financial performance. Also, a healthy dividend yield of 3.8% and payout ratio of 65% make it a good investment option for dividend investors. Dividends offered by KRFT are approximately 100bps above the industry average. Due to the abovementioned factors, I remain bullish on the stock.

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.