Kraft Foods - A Power Play Stock

On Kraft Foods' (KFT) investor relations website, you will find a wonderful presentation called "Unleashing a Global Snacking Powerhouse." During the Barclays Capital Back to School Consumer Conference on Sept. 6, Kraft Foods Chairman and CEO Irene Rosenfeld detailed the strategic growth priorities for Mondelez International, Inc., the new global snacks company that will debut next month.

Kraft Foods plans to spin off its North American grocery business, to be named Kraft Foods Group, on Oct. 1, 2012. Following the spin-off, Kraft Foods will be renamed Mondelez International, Inc. According to Rosenfeld:

As our results show, we've significantly changed the trajectory of our business to deliver sustainable, profitable growth. With the spin-off of our North American grocery business, we're now ready to unleash a global snacking powerhouse that's poised to deliver top-tier revenue and earnings growth.

Kraft Foods is the largest food company in the U.S., with the world's largest cheese brand (Kraft) and the world's largest cookie and cracker businesses (Nabisco). In February 2010, Kraft acquired Cadbury for GBP 11.9 billion. The new Kraft Foods generates more than half of its sales in international markets and 26% in emerging markets, and it has become the No. 1 global player in chocolate and confectionery with a market share of 14.8%. The category mix improves with the higher-growth confectionery and snacks units accounting for 51% of group sales, up from the previous 37%. These two units are less commoditized and grow faster than Kraft Foods' other segments.

As mentioned above, Kraft Foods is splitting the company into two independent entities on Oct. 1, 2012: Kraft Foods Group (North American grocery) and Mondelez (global snack business). The de-merger should unlock significant value because a separation should attract two different groups of investors, one searching for value and one for growth. By applying different valuations for these two businesses, analysts arrive at a per share value between $14 and $16 for Kraft Foods Group, and $28-$34 for Mondelez. That means Kraft Foods stock should have a "fair" value between $42 and $50, with the midpoint clearly higher than the current share price.

Apart from favorable earnings prospects, which are underlined by recent quarterly results, the de-merger provides additional support to the share price, making Kraft Foods a rock solid stock in the currently stormy time. In this context, the company issued a 2013 EPS target of $2.60 for the still combined company, including restructuring charges of 26 cents, compared to consensus estimates of $2.72.

Final Note

For Mondelez, management expects 2013 EPS in the range of $1.50-$1.55, which seems disappointing at first glance. Management expects Mondelez to be hit by a 15 cents negative currency impact in 2013 at the EPS level, while analysts only baked about 8 cents into their forecasts. Long-term targets for this business include 5%-7% organic sales growth, high-single-digit EBIT growth and double-digit EPS growth per annum. Strong exposure to emerging markets (45% of sales) and to faster-growing segments (biscuits, chocolate, and gum) underpin its superior growth rates

For Kraft Foods, the focus is on cash generation via margin expansion. Sales growth is targeted "at or above [the] North American food and beverage" rate. EPS growth is seen at mid- to high single digits. Dividend per share for 2013 is set at $2, implying a dividend yield of 5%-6% (depending on the spin-off price range), almost the highest among large peers. Looking forward, the company sees plenty of opportunities for cost cuttings, aiming at returning 50% of savings to shareholders and investing the other 50% in marketing and innovations.

Clearly there is still enough upside potential for the stock price, so if you are looking for a power play stock, take a look at Kraft Foods.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in KFT over 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.

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