Kraft Foods (NYSE: KFT) reported second quarter earnings and revenue that increased due to its Cadbury business. Kraft's revenues shot up 25%, while its net income rose 13%, though earnings per share (EPS) reflected less of these gains.
IN PICTURES: 10 Ways To Cut Your Food Costs
Kraft's Results
Investors should keep in mind that all of Kraft's numbers this quarter are with the Cadbury acquisition, unlike last year's Q2. EPS was 53 cents, down from 56 cents in last year's same quarter. Excluding charges, EPS was 60 cents. Kraft had more outstanding shares in this year's Q2. Kraft's revenue was $12.33 billion for the quarter, up from $9.78 billion. Net income was $937 million versus $827 in last year's Q2. For perspective on revenue and income, the company expects organic growth of net revenue of 3-4% for the full year.
A Well-Krafted Quarter? Or Not?
Kraft's North American sales for cheese, salad dressings and crackers were down due to discounts and promotions by competitors. The amount and mix of cheese that Kraft sold was off 11.8%. North American grocery sales were off 6.2% and 3.5% for snacks. Even with this, Kraft's North American revenues increased by 6.3% to $6.16 billion. Sales in Europe were helped greatly by Cadbury, though France and Spain were weak. The company eventually expects to save $750 million with the Cadbury integration, but it will have to spend $1.5 billion to completely integrate it.
Kraft's story is similar to that of the food companies and other consumer products companies. It faces a consumer reluctant to spend, pricing pressures in a highly competitive sector and the additional task of fully integrating Cadbury. The Street's view on Kraft is fairly mixed. Those who are more enamored by the Cadbury acquisition and potential efficiencies are offset by those who are lukewarm to the pricing pressures and the balky consumers that Kraft faces. Call it stock market ambivalence.
Packaged Food Woes
Kellogg (NYSE: K) reinforced the negative atmosphere surrounding the food companies with its lousy earnings report back on July 29. The company had just about everything it didn't want: falling revenue and earnings, a product recall and lowered guidance. Breakfast cereal is not exactly a luxury item, so Kellogg's report sent a wave of concern through the stock market.
Other food companies such as Heinz (NYSE: HNZ), which is due to report earnings on September 1, should fare better if they hit estimates. Ketchup, like cereal, is pretty mundane stuff, too, so the market won't react kindly if consumers cut back on that. Campbell Soup (NYSE: CPB), on the other hand, is expected to report flat earnings for the quarter. Again, soup is hardly a high-line item, yet both soup and cereal have been mentioned during the recession as centerpieces for dinner for cash-strapped consumers. For another food packager, Hormel (NYSE: HRL), estimates look similarly flat. By comparison, Kraft's organic growth projections and modest earnings estimates of around $2 a share look pretty good in such a dismal environment. Average in this sector is the new good.
Kraft Stock
Kraft is still the best-performing food packaging business despite the difficult environment in the space. It's still digesting the massive Cadbury addition, so this won't be fully integrated for some time. Kraft stock is trading near its 52-week high, but it's a stock that doesn't historically move that much. It pays a dividend currently yielding 3.9% and trades at a P/E of 17. This is a long-term slow grower. We'd like to see Cadbury fully digested so it becomes truly accretive. Then investors should wait for a better price to buy Kraft stock. It would also be helpful if the economy started cooperating. (To learn more, see A Guide To Investing In Consumer Staples.)
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