Kraft Foods Is Worth How Much?

Yesterday, Kraft Foods (KFT) provided an update on fiscal 2011 results. Operating EPS was guided to $2.28 or slightly above analysts estimates. Naturally the company got a lot of media attention.

What didn't get a lot of attention is that Kraft now trades at a rich multiple for a company with just 6.5% organic revenue growth. The forward PE (2012) is now over 15. A very rich price when the S&P500 trades at roughly 13x 2012 estimates.

Kraft is a solid company, but the PEG ratio sits at 1.7 with a 5 year growth rate just short of 10%. Also, the dividend yield has dropped to only 3.1% with the stock jumping from the low $30s at the start of October to nearly $39 today.

Is Kraft worth paying that much? That would be my major concern when investing in the stock.

Kraft also announced the shedding of 1,600 positions from a global workforce of 127K. Not a huge percentage, but interesting considering the expectations for 10% growth in 2012. Less employees doesn't typically increase growth.

The Consumer Goods sector had a good 2011 that was especially highlighted by a strong Q4 as investors rushed into dividend paying stocks.

The sector appears rich to us. Some other stocks such as Conagra (NYSE:CAG), General Mills (NYSE:GIS), and Phillip Morris (NYSE:PM) appear just as expensive as Kraft. Below is a comparison of these Consumer Goods stocks highlighting the ratios that appear expensive:

Stock Dividend Yield (%) 5 Yr Growth (%) Forward PE PEG Ratio
Kraft Foods 3.1 10.0 15.4 1.7
ConAgra 3.6 7.3 13.8 2.1
General Mills 3.0 7.7 14.5 2.0
Phillip Morris 3.9 12.5 14.2 1.25

Before exiting the sector one needs to realize the a 3% dividend remains attractive to many investors so these stocks might have further upside in the short term.

Other than Phillip Morris, these stocks hit new 52 week highs today suggesting more gains might be in store in the short term. Investors though should note what has happened to Phillip Morris the last couple of weeks. When these other stocks role over, those 3% dividend yields can quickly become swamped by capital gains losses.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. All data sourced from Yahoo! Finance. Please consult your financial advisor before making any investment decisions.