Kraft: A Tasty Long-Term Play - Barron's

Kraft is famous for the comfort foods it manufactures, like Macaroni & Cheese and Oreo’s. But Barron’s wonders why the company’s growth prospects, low debt, strong cash flow and dividends aren’t comforting investors. Shares have slipped from $36 to $32, or 16 times earnings, as prices for raw materials like corn and milk rose so steeply that the company couldn’t fully pass on costs to consumers. Net income dropped 6% last year, and 13% in Q1 -- although Kraft (KFT) still maintains its 2008 guidance.

Kraft offers a $1.08/share dividend with a yield of 3.5%. That’s one attraction for Warren Buffett’s Berkshire Hathaway (BRK.A), who now owns 10% of Kraft's shares. Buffett probably also liked the company’s three-year restructuring plan to cut $1.2 billion in costs (now in year two), its significant investments in both new and existing brands, its push into emerging markets, and an opportune cookie business acquisition from France’s Danone last year. UBS analyst David Palmer thinks more acquisitions are possible, and sees a stronger second half as dairy prices stabilize and cost-cutting gains traction. He also likes the continuing divestiture of non-core brands and thinks a share buyback may be in the offing.

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• Rick Shea says strapped consumers are looking for more deals on food products: “In categories like cereal, roughly 55% of every product sold used to be on some sort of 'cents off' deal. That ratio has now increased to over 60%.” Shea says that will put an added strain on Kraft’s bottom line.
• Michael Shedlock thinks Kraft’s bottom line is also being affected by oil prices: Farmers that previously grew wheat and soybeans for food processors like Kraft are now using more of their land to supply ethanol. This should further strain prices.
• Stuart J. Shaw, however, agrees with Barron’s that the stock is a long-term play, citing insider stock purchases and contrarian investment indicators.

Comments

[Budlab]

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[Paul Price]

Date: May 19, 2008 05:59AM


Kraft shares have been real dogs since 2002 and with good reason.

Year.........EPS......... Flow/Share.........High Share Price.........Low Share Price

2002......$2.02..........

2007......$1.82..........


Kraft's per share earnings declined over the full five years and its share price has gone sideways to down.
Cash flow per share barely grew over those 5 years either.

Kraft shares finished last week at $32.51 or almost exactly at their LOW price from the year 2002. Those silly enough to have bought at 2002's high are down 25.9% in share price six years later [and still negative on a total return basis even after considering dividends].

All the commonly quoted reasons for owning KFT such as 'great brand names' and 'people are always going to eat' were as true back in 2002 as they are today but did nothing to help you if you paid too high a valuation to get in six years ago.

Buyers in 2002 were the 'no-brainers' not the shares.

I do expect KFT to do a bit better looking forward but there are much more compelling values
available elsewhere.

[Paul Price]

The high and low share prices did not transfer above. Here they are:

KFT: 2002 High = $43.90 Low = $37.20
.......2007 High = $32.50 Low = $30.00

[Walt17]

Kraft might look good on paper. In the store there are cheaper alternatives to their products. Kraft's margins will continue to suffer unless they find a way to compete with store brands. Some of the store brands are quite good.

[Turbo Grande]

Paul:

I own a little KFT and it has made me some money over the past couple of years.

You need to fact-check your numbers. I believe that KFT sold for $36.50 a share back in June 2007, thats more than 10% above the high for the year that you quoted.

I've bought in under $31 and sold out over $35 a couple of times, and collected dividends in the interim with little downside risk. I know this isn't the Buffet way, but it has worked for me.

However, your incorrect figures mask the fact that this is a stock that can be traded profitably.