Kraft Has Certainly Been Busy
Tim is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If nothing else, Kraft (NASDAQ: KRFT) has not sat idle these past several months. Investors will have heard the announced split between the grocery and snacks businesses. But either in preparation for, or in conjunction with the tax-free spin-off expected to be complete by year end, management is earning their keep.
Here are a few notable deals and transactions, most announced in the last week or two:
According to a paper in Bristol, England, Kraft has found a buyer for the Cadbury factory there, and should fetch about $54 million. You may remember the deal for Cadbury closed about a year and half ago. Now $54 million is a drop in the bucket compared to the $19.5 billion KFT paid for the company, but it is notable and the company can use the cash.
The recent sale of $800 million in 18-month notes to help cover pending debt payments was directly related to the pending break up. Kraft has some significant debt coming due in the next six months and it’s important to keep this and future issuances at or above investment grade. Dropping below that magic line (and existing Kraft debt is already close) can cost millions as investors demand a higher return for the increase in risk. The pending debt totals nearly $3.5 billion, and with only $2 billion on the books now, the notes should help ease the debt burden in the short run.
Of course the big news driving today’s price movement are plans to reduce 1,600 jobs prior to the spin-off. Clearly this is a positive move, considering the cuts will come from the U.S. sales division and result in better alignment with the two companies. Efficiencies and a more streamlined business, or businesses in this case, is a key objective of the break-up.
Also, analyst estimates for fiscal year profit of $2.27 a share should be just about right (10% year over year growth) according to company management. As investors know, negative earnings news has not been dealt with kindly of late, regardless of industry, so this bodes well.
Though hardly the sole reason to invest it's always good to see an insider, in this case Director Fredric Reynolds, adding about $1 million in shares the second half of 2011. And why not? A fairly stable management team is in place for both post-split companies; the split should unlock unrealized value in the snacks business and offer more conservative investors a solid income-producing option. There appear to be a lot of reasons for an insider to buy, and Mr. Reynolds’ moves confirm that.
So where does that leave investors considering Kraft? Certainly with no shortage of information to digest, but let’s add just a couple more items of possible interest. The combined company is currently trading at nearly 21 times earnings, well above both Kellogg Company (NYSE: K) and General Mills (NYSE: GIS). They are trading at 15.75 and just over 17 times earnings, respectively. That’s pretty steep for a consumer staple.
Of course supporting a fair value is the impetus for Kraft making two distinct companies to begin with. For the growth-oriented snacks division with designs on emerging markets, a 20+ P/E is not overly concerning. But for a conservative, income-oriented company most expect the grocery business to be, that is pricey. Add to that current stock prices right at 52-week highs, and there are real questions about upside potential right now.
For new investors, the 3% dividend may be about all you’ll see until the split shakes out. And that may be just fine for your circumstances. But if you’re expecting significant growth in addition to the income, it’s going to be a long wait.
The investment opinions included are just that, opinions. Tim is not a licensed investment professional, nor has he been for several years. Investing involves risk, as you well know, so consider your decisions wisely.
