Does Kraft Foods Make for an Intelligent Investment?

This article is now exclusive for PRO subscribers.

Kraft Foods Inc. (KFT) manufactures and markets packaged food products, including snacks, beverages, cheese, convenient meals and various packaged grocery products. It sells the products to consumers in approximately 160 countries.

The Company operates three segments: Kraft Foods North America, Kraft Foods Europe and Kraft Foods Developing Markets. As of December 31, 2009, the Company had operations in more than 70 countries and made the products at 159 manufacturing and processing facilities globally.

As of December 31, 2009, the Company’s portfolio included nine brands, including Kraft cheeses, dinners and dressings; Oscar Mayer meats; Philadelphia cream cheese; Maxwell House and Jacobs coffee; Nabisco cookies and crackers and its Oreo cookie brand; Milka chocolates; and LU biscuits. On August 4, 2008, Kraft Foods completed the split-off of the Post cereals business into Ralcorp Holdings, Inc (RAH). In February 2010, the Company announced that it has acquired the control of Cadbury plc.

Does KFT make for an intelligent investment or intelligent speculation today?
Starting with a base estimate of annual Free Cash Flow at a value of approximately $3,500,000,000 and the number of shares outstanding at 1,740,000,000 shares; we used an assumed FCF annual growth of 9 percent for the first 10 years and assume zero growth from years 11 to 15. Review the Free Cash Flow record here.

The resulting estimated intrinsic value per share (discounted back to the present) is approximately $35.88.

Market Price = $28.6
Intrinsic Value = $35.88 (estimated)
Debt/Equity ratio = .91
Price To Value (P/V) ratio = .8 and the estimated bargain = 20. percent.

Before we make a purchase, we must decide:

( Filter #1 ) Is Kraft a high quality business with good economics?

( Filter #2) Does KFT have enduring competitive advantages?

( Filter #3 ) Does KFT have honest and able management?

The current price/earnings ratio = 16.5
Its current return on capital = 4.04.
Using a debt to equity ratio of .91, KFT shows a 5-year average return on equity of 9.6

Some industries have higher ROE as they require no assets, such as consulting firms. Other industries require large infrastructure builds before they generate a penny of profit, such as oil refiners. Generally, capital-intensive businesses have higher barriers to entry, which limit competition. But, high-ROE firms with small asset bases have lower barriers to entry. Thus, such firms face more business risk because competitors can replicate their success without having to obtain much outside funding.

Growth benefits investors only when the business in point can invest at incremental returns that are enticing; only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts the investor. The wonderful companies sustain a competitive advantage, produce free cash flow, and use debt wisely.

Does KFT make for an intelligent investment or speculation today? Time is said to be the friend of the wonderful company and the enemy of the mediocre one. Before making an investment decision, gain an understanding about the company, its products, and its sustainable competitive advantages over competitors. Next, look for able and trustworthy managers who are focused more on value than just growth. Finally ask: Is there a bargain relative to its intrinsic value per share today?

Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be mispriced. In terms of Opportunity Cost, is KFT the best place to invest our money today?


How will KFT compete going forward? Keep in mind that a financial report like this is a reflection of the past and present. It may be used to project a future, but it may not account for factors yet unseen. Therefore, pay attention to competitive and market factors that may affect changes in profitability.

In summary, using a debt to equity ratio of .91, KFT shows a 5-year average return on equity = 9.6 The estimated intrinsic value per share (discounted back to the present) is approximately $35.88. The Market Price = $28.6 and the Debt/Equity ratio = .91

The Price To Value (P/V) ratio = .8 and the estimated bargain = 20. percent.
Going forward, are there any tranformational catalysts or condition indicators imaginable on the horizon? As always, I appreciate hearing your views,

Disclosure: no positions