Kraft: Best Positioned in Food and Beverages Industry

Faizan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Food and beverage companies in the U.S. operate in a mature industry. The companies in the industry are aiming for cost reduction and product innovation to achieve growth. Kraft Foods (NASDAQ: KRFT) is one of those companies. Specifically, Kraft has been working on margin expansion and product innovation to achieve its long-term growth target.

What's happened
Kraft Foods Group started trading as a standalone company after spinning-off Kraft. The company is focused and has markets in North America. It is a stable business with annual revenue of approximately $19 billion. The company manufactures and markets branded food product across North American markets. Subsequent to the spin-off, Kraft Foods is expected to enjoy sales growth of 1%-3% and bottom-line expansion in the range of 7%-8% per year. In the long run, the company is expected to expand its top line in line with the food and beverage industry in North America. Other than attractive growth opportunities, Kraft also offers a decent dividend yield of 3.7%.

Kraft’s stock price is up almost 16% year to date. The company has posted healthy financial performance for the first quarter of 2013. Revenues for the recent first quarter were $4.55 billion, 2% higher as compared to the corresponding period last year. Moreover, Kraft was successful in posting earnings per share of $0.76, which were $0.12 higher than the analysts’ expectations.

Opportunities ahead
Since the spin-off, the company is focusing on its core grocery business and North American market; this is helping it to improve upon its management and cost structures. Kraft has gross and operating margins of 32% and 16%, which are below its peers. Analysts are estimating Kraft to enjoy operating margin expansion of almost 300 basis points. The \fFollowing table shows a margin comparison between Kraft and two of its top competitors.

<table> <thead> <tr><th> </th><th> <p><strong>Gross Margin</strong></p> </th><th> <p><strong>Operating Margin</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>Kraft Foods</strong></p> </td> <td> <p>32%</p> </td> <td> <p>16%</p> </td> </tr> <tr> <td> <p><strong>ConAgra Foods</strong> <span class="ticker" data-id="203032">(NYSE: <a href="">CAG</a>)</span></p> </td> <td> <p>23%</p> </td> <td> <p>11%</p> </td> </tr> <tr> <td> <p><strong>Hershey Foods</strong> <span class="ticker" data-id="203954">(NYSE: <a href="">HSY</a>)</span></p> </td> <td> <p>42%</p> </td> <td> <p>18%</p> </td> </tr> <tr> <td> <p><strong>Industry Average </strong></p> </td> <td> <p>36%</p> </td> <td> <p>17%</p> </td> </tr> </tbody> </table>

Kraft is likely to experience margin expansion by improving its supply chain, implementing restructuring initiatives and reducing costs. The ongoing restructuring initiatives include reducing overhead and improving the breadth of the U.S. grocery division’s sales. These ongoing initiatives also include consolidation of the management centers in the U.S. that will lower general and administration expenses and eventually lead to margin expansion for Kraft. 

Kraft also owns a strong brand portfolio including Maxwell House, Capri Sun, Jello, Planters, Oscar Meyer and others. The company has more than 50 product categories and its top 12 categories account for approximately 70% of the revenue. These strong brands along with Kraft’s dominating market share bode well for the company in delivering strong financial performance in the future. As the company operates in a mature and competitive industry, product innovation is the key to fuel top and bottom-line growth. 

A look at competitors
ConAgra Foods (NYSE: CAG) is a manufacturer of branded food products and ingredients. The company has two main operating businesses; Consumer Foods and Commercial Foods. It seems the worst is priced into the stock and recently the company has done a good job in product innovation and increasing the advertisement budget to strengthen brand image and consumer loyalty. Going forward, the company might opt for strategic acquisitions and restructuring to fuel growth and improve efficiency. Restructuring efforts aimed to improve efficiency is believed to be an important stock price catalyst for ConAgra as it has lower margins in comparison to its industry average (as shown in the table above). 

ConAgra has experienced sales growth of 4.8%, EPS and dividend growth of 3.25% and 5.70%, respectively, in the last five years. Moreover, the analysts are forecasting a healthy growth rate of 12% per year for the next five years. Other than strong growth prospects, the company offers a decent dividend yield of 3%.

Hershey Foods (NYSE: HSY) manufactures, distributes and sells its confectionery and grocery products. The primary markets where the operations of the company are focused on are Canada, Mexico and the U.S. Among the popular products offered by Hershey are Hershey’s chocolate, Jolly Rancher and Twizzlers candies. The company has the leading position in the U.S. chocolate market which is expected to fuel earnings growth in the longer term. Moreover, the company has been spending aggressively, approximately 6% of annual sales, on advertisement that will prove beneficial for the company. Hershey has been also undertaking manufacturing realignment program, which is expected to result in annualized savings of $60 to $80 million by 2014.

Hershey has registered sales, earnings and dividend growth of 6.1%, 25% and 6.5% respectively in the last five years. Analysts are expecting Hershey to deliver earnings growth of 9.5% per annum over the next five years. Other than healthy growth projections, the company offers a decent dividend yield of 1.90%.

Food and beverage companies with significant developed market exposure are focusing on restructuring, product innovation and strategic acquisitions to fuel growth in the longer term. This is mainly due to the mature and competitive nature of the industry. Also, these food and beverage companies offer decent dividend yields.

Among the companies mentioned above Kraft Foods offers an attractive investment opportunity due to the factors outlined above.

Kraft Foods Group is entering a new era after its recent corporate breakup. Its brand power is indisputable and its market share dominates, but Kraft's growth potential is limited and its heavily-commoditized categories face massive pressures. In The Motley Fool's premium report on the company, we guide you through everything you need to know about Kraft, including the key opportunities and threats facing the company. To get started, simply click here now.

Faizan Chudhry has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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