Looking Beyond Kraft Foods’ Q2 Results
Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Currency fluctuations and strengthening of the dollar have been obvious problems for large companies that have wide geographical operations since their revenue decreases when it is converted to their domestic currency. Recently, toy maker Hasbro reported weak revenue of $811.5 million, a drop of 11%, which was partly pulled down by unfavorable foreign currency translations, along with low demand for its products.
Kraft Foods (NASDAQ: KRFT), manufacturer and provider of packaged foods, experienced similar concerns in its second quarter. The mixed results missed on the top line but managed to beat estimates on the bottom line, sending shares higher.
The Picture Looks Different
Dragged down mainly by currency fluctuations, revenue stood at $13.29 billion, a drop of 4.3% from last year. Additionally, an early Easter led shoppers to buy more in the first quarter of the year. Hence, second quarter’s sales were lost to that of the first quarter. Also, volumes declined slightly, mainly because of price increases during the quarter, which came as a shock to the buyers. Nonetheless, the price hike had a positive effect on the bottom line, enabling it to grow 9.7% to 68 cents per share. A well executed cost control strategy was another driver for earnings growth.
All the geographical segments registered organic revenue growth, the maximum coming from the emerging markets. A positive point to note here is the fact that even Europe posted revenue growth in spite of prevailing economic conditions, which gives us great hope for the company to do extremely well, especially if the economy shows signs of recovery. A key problem faced in the region was low demand from the teenagers for its gums. But the food maker has a strategy lined up for it. It is planning to introduce new items to generate vigor in the segment. Stride ID, a variant of gum with candy, is to be launched in the near future and is expected to attract teenagers once again to the segment.
Better Results than the Peers…
The packaged food provider has been very efficient in managing increasing input costs, which reflected in its bottom line, and the gross margins, which increased 160 basis points over the prior year. This was affirmed by its peer Kellogg’s (NYSE: K) performance, in sharp contrast to that of Kraft. Though Kellogg’s second quarter revenue increased 2.6% to $3.48 billion over the last year, it was unable to translate the same to its bottom line. Its earnings plunged 10.6% to $301 million since the company was unable to manage rising input prices. Kraft Foods takes the cake due to its cost control measures and strong productivity.
Spin-Off and Its Potential Benefits
Kraft Foods also announced the spin-off of its grocery business in North America, separating it from the snacks business. Hence, investors will have the option of investing in either of its businesses separately. Grocers have been doing well in the prevailing weak economic conditions. Therefore, it gives us an opportunity to invest in this segment only without depending on the snacks business from October onwards. On the other hand, the international snacks business provides an opportunity to invest in emerging markets, which have great growth potential. Moreover, even the company will be able to deliver better results by catering to each of the company’s needs individually instead of a holistic approach for both.
Kraft Foods looks like a tortoise which is slow but is quietly moving towards its goal of providing value to shareholders. It has sincerely overcome Europe’s obstacles and has more strategies in line to fight weak demand in the region. The company managed to grow its margins by increasing prices and has been posting earnings growth over the last few quarters.
This growth is important since it comes at a time when most companies are struggling for survival. Its exposure to the emerging markets is a storehouse of potential since it derives maximum growth from there. I believe small hiccups such as the strengthening dollar pulling down the top line cannot stop the company from growing into an investor’s favorite.
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