The New Kraft
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Since separating itself from its international snack division and redefining the company as a North American consumer packaged food and beverage brand in October, Kraft Foods (NASDAQ: KRFT) is journeying down a new path. The company is in the process of remaking and rebranding itself into the business current leadership always wanted to create but was seemingly held back from building previously. As a "$19 billion startup," as characterized by chief executive Tony Vernon in a recent conference call, the company is off to a good start but not without new challenges.
Kraft has been a revolving-door investment for certain top investors. Some are betting on the new Kraft for the first time while others are taking their profits and investing elsewhere.
For instance, hedge fund investor Daniel Loeb, who runs the $8-billion Third Point, recently told investors that Kraft was now one of the fund's largest holdings, according to Reuters. Meanwhile, Warren Buffett has strategically been reducing Berkshire Hathaway's position in the stock in recent quarters. Activist investor Nelson Peltz, who runs the multi-billion dollar asset management firm Trian Fund Management, cut his position, too. Investors are short on about 5.3 million shares of Kraft, according to The Wall Street Journal.
3Q Kraft Holdings*
|Daniel Loeb||5 million|
|Nelson Peltz||8.1 million (down from 10.5m in 2Q)|
|Warren Buffett||30 million (down from 59m in 2Q)|
Nonetheless, Kraft, in its most recent incarnation as a North American grocery company, appears focused and intent on strengthening its brand and increasing its investment into certain products, including Cool Whip.
Most recently, Kraft has taken on Betty Crocker and Duncan Hines by developing its version of cake frosting. Cool Whip Frosting will be available in chocolate, vanilla and cream cheese flavors and will retail for about $2.99 per item, according to Food Business News. The frozen food frosting will offer customers another option from the traditional shelf-frosting products and according to Kraft executives cited in Food Business News there is demand for more choices.
While a group of companies are focused on paying special dividends before the start of the New Year to protect investors from a potential hike in income taxes in 2013, Kraft is not jumping through those same hoops. It is making its first distribution as an independent in January 2013 and will pay a $0.50 quarterly dividend. Tony Vernon, Kraft's chief executive, said:
"the payout.. [is] targeted to grow consistently, year after year.” -- (Tony Vernon, Kraft CEO)
In the 3Q, cash flow was reported at about 70% of GAAP net income, which is about what the company is projecting in the 4Q. Kraft is not done taking restructuring charges from the recent split and expects that will amount to about $225 million of costs in the current quarter. Kraft is also going up against some tough comps from last year's 4Q and is bracing for flat-to-down revenues as a result.
Kraft investors are going to have to be patient as the company gets through the tough part of its separation but should be rewarded with a profitable 2012 and "strong results" in 2013, according to executives on the company's 3Q earnings conference call.
Competition Heats Up
Kraft is also going to be up against some increased competition, with ConAgra Foods (NYSE: CAG) recently adding the private-label muscle of Ralcorp its portfolio. The $6.8 billion deal, including Ralcorp's debt, was approved by the boards at both companies, and creates the single-largest private label packaged food business in North America, according to Supermarket News.
ConAgra has been on the acquisition trail, and only months before buying Ralcorp acquired the frozen meal business from Unilver (NYSE: UN) in a $265 million deal, which included the Bertolli and P.F. Chang brands.
Unilever has been shedding assets of late in an attempt to focus on its core consumer goods business. Most recently, Unilever has placed peanut butter brand Skippy on the block, according to Bloomberg, for which ConAgra is among the rumored potential buyers.
The recent changes in the grocery landscape are sure to keep Kraft executives on their toes. Luckily, the leaner and meaner executive team appears up for the challenge.
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