Although stock prices and the job market have come back to some degree, investors still remain shaky over the future of the world economy. Fears remain over a number of geopolitical concerns ranging from turmoil in North Africa to the rebuilding efforts in Japan, pinning investor sentiment in the near-term. As a result, many have begun to once again focus on some of the country’s ‘blue chip’ companies that look to prosper no matter what happens around the globe. One such company is Kraft (KFT) world-famous for its staple products ranging from cheese and Oreos to Maxwell House coffee and Oscar Mayer meats.
While Kraft’s products may be the mainstays of pantries and refrigerators across the country, the company is not without its issues. A confluence of factors could derail this world-renowned firm and leave many value investors disappointed with what used to be one of the most solid companies in America. Below, I highlight three huge issues facing the company and why investors may want to consider taking a second look at KFT before stocking up on the brand for their portfolios.
1. Commodity Prices
Arguably, KFT is in the sector that is most hurt by commodity price increases, as the company is in a very competitive market and thus has a hard time passing on costs to consumers. Coffee futures have gained nearly 90% over the past year while corn prices have more than doubled in the same time period. Other commodities such as sugar (up 64%) and wheat (up 68%) have also posted tremendous gains as well, putting Kraft in a difficult spot in its attempt to keep margins high and consumers happy at the same time.
2. High Debt
Thanks in part to its acquisition of Cadbury, KFT has managed to rack up an impressive level of debt. KFT is now approaching a 50/50 split between debt and equity and more of it looks likely to stay on the company’s books for the foreseeable future. In fact, KFT has to roll over close to $9 billion in debt over the next four years, and with interest rates seemingly poised to rise in the time frame, it could push the company’s borrowing cost sharply higher.
3. Weak Growth
The company’s debt sins and even its questionable purchase of Cadbury, could be forgiven if either had brought high growth rates with them, but as investors have seen recently, this has not been the case. Sales from the Cadbury division have been flat in key markets and although revenues are up significantly, operating income has failed to keep pace, suggesting that the cost of goods sold is significantly eating into the company’s bottom line already.
Due to these factors, investors would be wise to take another look at Kraft before considering it for their portfolios. While the company may have very strong brands and is likely to be around for decades to come, the confluence of issues that the company is likely to face in the years ahead presents a compelling case for the company’s underperformance in the short-term. Investors should consider achieving exposure to the consumer sector in any number of other ways, instead focusing on companies that are better positioned to grow and those that have far less debt then the over burdened American icon, Kraft.
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