Don’t Get Too Excited With Kraft’s Results
Tim is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The good news for Kraft (NASDAQ: KRFT) after Tuesday's earnings announcement is the food giant walked the Heinz path rather than those of Kellogg (NYSE: K) and General Mills (NYSE: GIS). In other words the company didn’t allow a tough commodities and North American market to curtail sales and ultimately profits. Those were the two culprits behind less than stellar news recently from General Mills and Kellogg.
Kraft Results
By virtually all accounts Kraft outperformed quarter-over-quarter results and those of analysts. Perhaps most impressive of the many impressive numbers was the 7% growth in revenues in North America. That’s something even Heinz (NYSE: HNZ) -- with all the good news they recently reported – wasn’t able to do. Heinz did their damage in emerging markets, more than making up for a slight decrease at home.
Kraft’s Q4 revenue grew which in turn meant a significant jump in earnings. Excluding one time items the increase was over 50% from Q4 of 2010. That’s heady stuff. And with the pending break up of the grocery and snacks businesses later this year – not to mention the previously announced debt issuance – these results were exactly what the company needed.
But here’s the caveat, and it’s much the same story as with Heinz. The company is fairly valued right now at current levels, and maybe even a bit steep at 21 times earnings. The result is investors are left with little in the way of additional upside, at least for the near future. Income seekers will enjoy the 3% dividend yield, but don’t expect too much in the way of growth over and above that.
And what about the relatively inexpensive General Mills and Kellogg? Both General Mills and Kellogg have their results – or in the case of General Mills they’re prepping the market for negative news -- to blame. Kellogg in particular is struggling. The last quarter’s decline in revenues was the fourth in succession. That’s not the kind of consistency investors are looking for. There’s a reason these two are the cheapest of the bunch. Kellogg’s recent purchase of the Pringles business for $2.7 billion didn’t exactly light a fire under Kellogg investors either – there are just too many questions right now for both these companies.
Kraft investors should also be aware of several one time items including the cost of a debt swap and other expenses related to the split coming in mid 2012. Those should be viewed for what they are -- one time events -- but splitting a $68 billion company is going to take some money to make happen. Kellogg is a solid hold right now and investors will enjoy a decent dividend -- but not a whole lot else in my opinion.
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