Kraft's Upside in the Altria Split

Includes: MDLZ, MO
by: Ishmiel Kapur

I have been following Mr. Anthony Sacks' (aka smokinstocks) blogs on Altria Group (NYSE:MO) and Philip Morris, and I must first start-off by giving him a round of applause. His blogs are excellent, and his portfolio shows that he's made a fortune from his position in MO from a while back, my congratulations.

I want to add to his comments on the splitting of Kraft (KFT) by Altria Group. This was indeed a long and expected move by the company that lasted many years, and finally their official announcement to let them go on 30 March hammered in the final nail. But instead of a rise in their price, a drop actually made more sense. Of course, it is easy to claim this while looking back at it, but my thought is that the split was already valued into their stock prices. That is much the reason why every time "no news" on the split comes out, their stock prices sag given that the expectation was "wrong". This time around, investors are cashing out, and waiting for new news, like the separating of their US and international tobacco business.

My interest really lies with Kraft Foods, and how the split will affect them. Much of the focus has been with MO, but it is interesting to see what also lies ahead for Kraft. My personal thought is, breaking free, and a good path ahead. The situation for them is much like a teenage kid. Over the past decade or two, Kraft has really been reluctantly part of Altria, more known for their tobacco business. With no recognition, and having a parent ordering them around, them obviously tend to slack and become a rebel. Break free and become independent, and you expect them to land on their feed and develop on their own.

The food business is stable. Everyone eats, everyone drinks, and everyone probably has some sort of food product from with Kraft, Campbell (NYSE:CPB) or Nabisco (per se) at home. But Kraft has been falling behind their competitors. Margins are lower, for example compared to Campbell Soup at an average margin of 42%, or Kellogg (NYSE:K) at an average of 46%, Kraft is as low as 30%. Costs just aren't controlled tough enough! Their share prices have stayed flat over the past few years, whereas Campbell and Kellogg have risen over 50% and 80%, respectively. But don't run away yet. The split was almost definitely to be announced within the year, and in preparation for Kraft's freedom from MO's bitter bondage, CEO Irene Rosenfeld was hired to make the big changes.

In fact, later this month Rosenfeld is expected to make public her drastic changes as another powerful woman as the CEO of a multi-national company. This includes selling of businesses, cost cutting, management restructuring to the issuance of debt (a good thing in this case, considering that the company has barely any) to buy back shares, boosting up EPS, paving the road to a good start. Her battles will probably be long and tough, since she will have to deal with changing consumer demands, most notably a more healthy and conscious diet. Costs are also something to worry about. Prices for food-related commodities such as corn and beans have jumped from global demand for food. Regardless though, being independent is good. Decisions will be made quicker and more efficient, and I expect Kraft's stock prices to catch up with their counterparts during 2007, and possibly outpace them by 2008.

My thoughts are now, expect a drop to about $30, get in and ride the waves. Reaching well over $40 over a year's time won't just be a dream.

KFT 1-yr chart

Disclosure: Author has no position in any of the above-mentioned securities.