Kraft Foods: Rumored Sale Of Breakstone's Dairy Business Could Prove A Positive Catalyst

Oct.20.12 | About: The Kraft (KHC)

Kraft Foods Group, Inc. (KRFT) is focused on the grocery business in North America. Kraft Foods Group, previously part of Kraft Food Inc., is an established company offering food and beverages, but is expected to post slow growth in the future as it operates in a mature market. The company is expected to log annual revenues of $19 billion, and top line growth of 1% to 3%.

Approximately three quarters of the company's total revenues are earned from its products category, in which it is the either the market leader or a close second. Kraft Food is attractive for dividend investors, as it has a dividend yield of 4.3%. We have a neutral rating on Kraft Foods Group. We did a detailed thesis on Kraft Foods Group after it started trading on October 2 following its spinoff.

The company is working on improving its operational efficiency to improve its bottom line. It has been focusing on its product portfolio, distribution and sales. Just two weeks after Kraft Food spun off its North America grocery business and its snacks division, Bloomberg reported news of Kraft Foods Group also selling its Breakstone's cottage cheese and sour cream business. The process of divesting the cottage cheese and sour cream business has not been made public so far and company officials have refused to comment on the news.

Breakstone's dairy business, which Kraft is expected to sell, is worth approximately $400 million. The potential buyer for Kraft's dairy business is Grupo Lala SA, a dairy producer of Mexico. Due to efforts by the company to focus on top categories and products, we might hear more on Kraft Foods selling some of its smaller brands.

As the company focuses more on its top products, it will be able to capture more market share and further strengthen its position in the market. The market in which the company operates is expected to grow at a slow pace. Focusing on stronger and popular brands will help the company grow at a faster rate than the overall market. Going forward, it is expected to boost marketing and advertising expenditure on popular brands.

Over the years, the company's margins have been trending downwards. However, if the company focuses more on popular brands as expected, it will help maintain and increase its margins as well. If the company's efforts of focusing on its popular brands are successful, this would increase its market power, implying that the company would be able to pass on commodity price increases to its customers. This would lead to stronger and healthy margins for the company in the future.




Gross Margin

34.7 %

33.8 %

32 %

Operating Profit Margin

17.2 %

16.7 %

15.8 %

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Source: and Qineqt's calculations.

The Kraft Food spin-off led to the formation of two companies: Mondelēz International, Inc. (NASDAQ:MDLZ) and Kraft Foods Group. We have conducted a thesis and given our recommendations on both of these companies. We are still bullish on Mondelez International because it offers better top and bottom line growth. We will be bullish on Kraft Foods if management indicates a clear plan on the brands it will be focusing on in future to drive growth.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Qineqt's Staples Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article