This Company Is Set For Big Profits

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

Kraft Food Group (NASDAQ: KRFT) is one of the best companies operating in the packaged food industry. The industry is very price competitive. It is tough for companies operating in this industry to achieve both top and bottom line performance. However, this industry has several advantages over the economic situation, which is a strong pro for companies operating in this industry.

In the case of Kraft, it has shown amazing growth after its spinoff from its parent company. In the last year alone, its price went up by 25%. This new company also started to pay hefty dividends to its shareholders. At the moment, Kraft is offering a quarterly dividend of $0.50 per share.

In this piece of writing, I will analyze Kraft’s ability to sustain returns. To do this, I analyze its business model, brands, and new innovations. I also look at both its top and bottom line performance to access its cash generating ability. I also check for its management’s moves to generate or save more cash for investors and for their business.

Kraft’s business model, brands and new innovations

Kraft Food Group was formed after the spinoff of Kraft Group. Kraft Foods Group is a consumer packaged food and beverage company. It manufactures and markets food and beverage products, including refreshment beverages and coffee, refrigerated meals, cheese, and other grocery products.

Despite losing the international platform of the snacks business after the spinoff, Kraft’s focus on domestic grocery business was the right move. Its portfolio consists of 9 brands, which generate over $500 million in annual sales. Kraft's solid brands - Jell-O, Maxwell House, Oscar Mayer, and Crystal Light - give it a competitive advantage to become a key supplier for retailers.

Combined with solid brands, Kraft has been generating massive returns on new product innovation. In the past four years, it has been able to launch several new products, like Philadelphia Indulgence Spreads, MiO Energy Liquid Water Enhancer, Oscar Mayer, etc. Recently, it announced first quarter results with strong organic growth of 2.1%.

Revenue, income, and margins

With a solid brand and new innovations, Kraft looks to be in a stable situation. In the first quarter, it has been able to show increasing both top and bottom-line performance. Kraft is operating under five business segments named Beverages, Cheese, Refrigerated Meals, Grocery, and International and Foodservice.

All of its business segments are generating increasing profits except for the grocery segment. The grocery business segment experienced organic revenue decline of 0.4%. All other business segments have shown solid growth in both net revenue and organic revenue. Additionally, its cost cutting measures led to higher profits when top line growth is slow, which represents the presence of strong management. The table below demonstrates that it has achieved 9.2% growth in operating margin when revenue growth is near 2%.

<table> <thead> <tr><th> <p><strong>Operating Income</strong></p> </th><th> <p><strong>March 30,</strong></p> <p><strong>2013</strong></p> </th><th> <p><strong>March 31,</strong></p> <p><strong>2012</strong></p> </th><th> <p><strong>Percent of change</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>Beverages</strong></p> </td> <td> <p>$125</p> </td> <td> <p>$98</p> </td> <td> <p>27.6%</p> </td> </tr> <tr> <td> <p><strong>Cheese</strong></p> </td> <td> <p>$172</p> </td> <td> <p>$167</p> </td> <td> <p>3%</p> </td> </tr> <tr> <td> <p><strong>Refrigerated Meals</strong></p> </td> <td> <p>$97</p> </td> <td> <p>$93</p> </td> <td> <p>4.4%</p> </td> </tr> <tr> <td> <p><strong>Grocery</strong></p> </td> <td> <p>$328</p> </td> <td> <p>$339</p> </td> <td> <p>(3.2%)</p> </td> </tr> <tr> <td> <p><strong>International & Foodservice</strong></p> </td> <td> <p>$124</p> </td> <td> <p>$101</p> </td> <td> <p>22.8%</p> </td> </tr> </tbody> </table>

Source: Quarterly Report (in millions)

Cash flow and balance sheet

On the other hand, Kraft is expecting to generate $1 billion in free cash flow at the end of this fiscal year. I believe its dividends are safe as it has the ability to generate hefty free cash flows. I think dividend investors should consider this company, as returning cash to investors through a top-tier dividend will be its key use of the substantial cash flows it generates.

Its balance sheet is not as good as its other financial matrices. Kraft is carrying long-term debt of $9.9 billion, according to the latest earnings report. However, it has a healthy current ratio of 1.47, which is sufficient to meet current liabilities. Its current assets represent 21.29% of assets while current liabilities account for only 14% of total liabilities. On top of that, it has been generating increasing profits and cash quarter over quarter. Thus, there is no red flag for the company to meet liabilities.


Kraft’s main industry peers are General Mills (NYSE: GIS) and Kellogg Company (NYSE: K). General Mills is a manufacturer and marketer of branded consumer foods. General Mills is a solid company with net sales of $17.8 billion. General Mills is a safe company for dividend investors. It has a very solid business model with a strong financial position. In the last year alone, it has returned $1.9 billion in cash to shareholders through dividends and its share repurchase program.

Recently, General Mills announced fiscal 2013 results with 7% growth in the top line while its bottom line growth is high at 19%. Operating cash flow increased by 22% in the last year alone. On the other hand, it has a healthy balance sheet to support its business. General Mills is carrying a low debt-to-equity ratio of 0.9 with high current and quick ratios. On the whole, General Mills is a safe company for dividend investors.

Kellogg is also set for big profits with recent moves. Kellogg has taken a few key steps to strengthen its future prospects and financial situation. It has suspended its buyback program to penetrate new emerging markets and engage in debt reduction. To do this, Kellogg has acquired the Pringle business, which led it to achieve 12% growth in its top line. This purchase is also aiding it to more fully capture the snacks market.

On the other hand, it is looking to use remaining funds for debt reduction. Recently, Kellogg’s management made a smart move by removing high-interest debt. At the end of the last quarter, its balance sheet showed a heavy long-term debt of $9 billion that was refinanced at low rates. At the moment, its current ratio of 1 represents no sign of insolvency.

Final notes

Kraft is a safe company for dividend investors. Its dividends look safe, as all of its business segments are generating increasing profits. Additionally, it is showing strong growth in new emerging markets with the launch of new products. Kraft’s management’s cost cutting measures led it to improve operating margins. Combined with solid brands and new innovations, it has a solid business model and strong management to generate hefty cash for share holders.

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siraj sarwar 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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