Friday, 14 February 2014

Kraft - dull but keep watching

Kraft - and its products - is well-known to apparently (as per the below) 98% of households in the US.  Which one of the brands below is your favourite?

Kraft has had an interesting last year or so as some of the brands that used to be grouped under its name has now been wrapped under the Mondelez banner and spun-out.  The latter (which will be subject to a Financial Orbit posting in due course) has out-performed its former parent quite handsomely over the last year:

My observation of the Krafts various cheese, beverage, snacks and nuts brands is that they are well-known...but a little tired.

Still Q4 results - which were released after the close yesterday in the US - did show some progress, but some improvement (including from the slightly confusing 'spin-off related trade inventory change') but note the continued negative pricing (driven by the beverage and snack/nuts business) especially when compared to the rest of the North American sector...

...a trend which was apparent in the FY13 period too where a -0.1% organic growth rate is perhaps more indicative of the company's recent dullness. 

And this continued into the 2014 guidance: a 'soft start...higher inventories...and climbing cost curve' is not a good combination...

Still, the hopes are for mid-single growth across a number of metrics for 2014:

So the question is: what is priced in?  Well the FY13 performance of US$4.6bn ebit and US$1.5bn of free cash gives an EV/ebit of x8.8 and a free cash flow yield of 4.7% (3.8% of which is paid out as a dividend).  The net debt level is fine (x2 ebitda). We are clearly in value territory...and the market has remained uncertain, with the share in a narrow channel over the last six months as shown below:

I am continuing to 'warm up' to Kraft but do I feel the need to buy today?  Not really.  One to keep watching though given the range of historic brands under its banner and 'dull' but cash worthy nature.  At a sub US$52 print one to start a position in for pension fund types. 

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