Post-Split, Kraft Foods Continues to Shuffle Brands
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Less than a year after its blockbuster split with now-independent Mondelez International (NASDAQ: MDLZ), Kraft Foods (NASDAQ: KRFT) has announced plans to separate its already-truncated roster of brands into two distinct divisions. Although the internal split technically occurred in early July, its impacts continues to be felt throughout the company and beyond. It is entirely possible that this move will set up a future spin-off that sees Kraft Foods split into two distinct entities.
For now, investors should take a moment to assess the strength of Kraft Foods and Mondelez relative to the competition. Additionally, a look at the composition of Kraft Foods' two divisions would be appropriate as well. Although the consumer food products business is not the most exciting industry in the world, consumers' tastes and attitudes toward healthy eating continue to change at a fairly rapid clip. Rising global living standards have a role to play here as well.
Kraft Foods, Mondelez and International Competitors
Kraft Foods and Mondelez operate separate but related businesses. The former firm concentrates on food additives and processed food products. These broad categories encompass everything from powdered drink mixes and processed cheese to frozen dinners, whipped toppings and frozen breakfast meats. Although it is difficult to lump these disparate products into a single category, it would be difficult to define any of them as "standalone snacks." By contrast, Mondelez specializes in producing classically defined "snack foods" like crackers, candy, gum and chocolate bars. Confusingly, the firm does produce some powdered beverages, including the popular Tang orange drink, as well as a number of processed meal offerings. As such, there is still the potential for competition between the two firms.
Both of these firms compete with a true behemoth: Nestle S.A. (NASDAQOTH: NSRGY). Switzerland-based Nestle resembles a pre-split Kraft Foods: In addition to packaged, frozen and processed snack and meal offerings, the company also sells a dizzying range of sweets, salty snacks, food additives, beverages and other consumables. Indeed, Nestle has a hand in nearly every mass-market food category in existence. All companies compete internationally but the loyalty to distinct brands allows the companies to still maintain decent margins.
Since Nestle's market cap is over $215 billion, its value is more than five times that of Mondelez and more than eight times that of Kraft. In 2012, it earned a healthy $11.6 billion on revenues of around $102 billion. By comparison, Kraft Foods took in $1.8 billion on $18.4 billion in revenues. With earnings of less than $2 billion on roughly double Kraft's revenues, Mondelez was significantly less profitable. While all three firms have hefty amounts of debt, Nestle is in slightly better shape than its U.S.-based competitors.
What Kraft Foods Just Did
According to reports, Kraft Foods recently executed an internal split that created two functionally independent divisions. Since Kraft Foods is in the unusual and enviable position of holding the keys to more than a dozen well-known consumer brands, this move is being advertised as a means for investors to track the performance of their "favorite" products more closely. All subsequent earnings reports from Kraft Foods will offer a detailed analysis of each division's performance. For the record, the fast-growing "meals and desserts" division will include Kraft's iconic macaroni and cheese meals as well as Cool Whip and Jell-O. Its higher-margin "enhancers and snacks" division will include the A-1 and Bull's-Eye barbecue sauces as well as Miracle Whip and Planter's peanut snacks.
Recent Price Performance vs. Mondelez
Since their split, Kraft Foods and Mondelez have exhibited nearly identical price performance. Both firms dropped slightly from their respective split prices before recovering nicely. At last check, Kraft Foods's 28 percent gain had just edged out Mondelez's 27 percent pickup. Both performances have shown up the broader market's gains by a slight margin.
Long-Term Outlook and Possible Investment Opportunities
When Kraft announced that it would split into Mondelez and Kraft Foods, it cited increased competition from Nestle as a crucial factor. In effect, Mondelez was conceived as a counterweight to Nestle's international dominance. As its full name suggested, the firm was to focus its marketing efforts on consumers in Europe and elsewhere.
This has largely come to pass. With Mondelez as its international buffer, Kraft has reasserted its control over the North American snack-foods market and stemmed the bleeding in its non-core operations. Indeed, the company's internal split can be seen as the next step in a restructuring process that began long before the Mondelez spin-off. Although no one at the company has said so, the firm's brand-management whizzes will almost certainly analyze the two divisions' relative performance to determine whether to begin paring redundant brands.
For consumers, this could point to a future in which Cool Whip and Miracle Whip no longer operate as separate product lines. For investors, this could lead to a gradual improvement in Kraft Foods' multiples and create a juicy opportunity over the medium term. Given their nearly identical post-split price performances, Mondelez and Kraft Foods might seem like equally attractive investment targets. In light of Kraft Foods's latest move to shore up its brands and the ongoing economic softness in Mondelez's core overseas markets, this might not be the case. Investors would do well to look more closely at Kraft Foods here.
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