KRAFT FOODS GROUP INC. $57 (Nasdaq symbol KRFT; Conservative Growth and Income Portfolios, Consumer sector; Shares outstanding: 596.3 million; Market cap: $34.0 billion; Price-to-sales ratio: 1.9; Dividend yield: 3.7%; TSINetwork Rating: Above Average; www.kraftfoodsgroup.com) makes a variety of grocery products, including Kraft macaroni and cheese, Oscar Mayer meats, Philadelphia cream cheese, Maxwell House coffee, Jell-O desserts and Miracle Whip salad dressing.
Unlike Mondelez, Kraft prefers to focus on North America: Wal-Mart accounts for 26% of its sales. That hurts its growth prospects, but it also cuts its currency risk.
Kraft continues to reduce its costs following the breakup with Mondelez, mainly by consolidating facilities, laying off employees and eliminating less-profitable products. These moves are helping Kraft offset rising ingredient costs.
Lower costs were the main reason why Kraft’s earnings jumped 65.3% in 2013, to $2.7 billion, or $4.51 a share. If you exclude unusual items, it earned $2.84 a share. In 2012, Kraft earned $1.6 billion, or $2.75 a share.
Revenue fell 0.3% in 2013, to $18.2 billion from $18.3 billion, as strong competition forced Kraft to lower its prices.
The company aims to spur its growth by improving its existing products and developing new ones. In 2013, new foods and other innovations supplied 14% of its revenue, up from 13.4% in 2012.
Kraft is also spending more to promote its products: advertising spending rose to 4.1% of its revenue in 2013 from 3.5% in 2012.
The company’s balance sheet is strong. As of December 28, 2013, its long-term debt was $10.0 billion, or a manageable 29% of its market cap. It also held cash of $1.7 billion, or $2.83 a share. This gives Kraft plenty of flexibility to buy back shares under its new $3-billion repurchase authorization. There is no time limit for these buybacks.
As well, Kraft recently raised its dividend by 5.0%. The new annual rate of $2.10 a share yields 3.7%.
The stock is up 26% since the split with Mondelez. It trades at a reasonable 17.8 times the $3.20 a share that Kraft should earn in 2014.
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