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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Kraft

March 5th 2010 Kraft
NYSE Symbol: KFT
Industry: consumer staple
Price as of 3/5: $29.34

It looks like the correction is over. The averages have rallied 7% off the February lows, now 300 points from the highs of the year. During the financial crisis, the members of the Dow Jones decided to shake up their Industrial Average. Last year, Citigroup was kicked out and replaced ironically with one of their spin offs, Travelers. GM was also replaced with tech blue chip Cisco Systems. Cisco is up 5% since we highlighted it a month ago. Travelers is up 21% not including three dividends of 93 cents since we featured it last June. Travelers goes ex-dividend on Monday for 33 cents a share. Back in 2008, Dow Jones had to take out AIG and replace it with this weeks featured stock, Kraft. Kraft is a blue chip consumer goods manufacture spun off from tobacco giant Altria. The company manufactures such popular brands as Oscar Mayer, Philadelphia cream cheese, Maxwell House, Jacobs, Nabisco, Oreo, Milka, and Kraft itself. Recently, Kraft has made news with a hostile offer that turned friendly to buy Cadbury. The deal has been agreed upon creating a manufacturing giant with global sales of $50 billion in 160 countries. There is no doubt Kraft will be able to ring out some cost savings from this deal and improve shareholder value. Investors looking for a defensive blue chip with a dividend yield of 4% going ex-dividend next month will be hard pressed to find a better stock.
In the middle of February, Kraft reported fourth quarter earnings of $710 million or 48 cents a share, beating estimates by 3 cents.
Revenue rose 3% to $11.03 billion as favorable currency swings and improving volume and mix offset lower prices. Kraft targets organic net revenue growth of 4% or more. In the conferecen call, Kraft discussed the pending merger with Cadbury. To get the deal done without issuing a lot of shares, Kraft decided to sell their frozen pizza business to Nestle for $3.7 billion. Kraft expected to loss 5 cents a share from the sale of the pizza business, but will pick it up with the acquisition and cost savings from the Cadbury deal. With the combined companies, Kraft is targeting earnings growth of 9 to 11% a year. Kraft will target industry-leading margins through improving product mix and leveraging their global scale. Kraft noted that 70% of its revenue outside North America now comes from snacks and confectionery, two rapidly-growing, highly expandable categories. The deal will create 11 brands with annual revenues of more than $1 billion. Moreover, 80% of the company's worldwide revenues will come from brands that hold the No 1. market position. In regard to developing markets, the Kraft notes that its scale is now greater than any of their North American food company and this scale and presence will make up the cornerstone on which they will grow. Cadbury's business with also give Kraft a meaningful entry into India and fundamentally transforms the reach of their brands in Mexico and South Africa.
Two weeks ago, Credit Suisse resumed coverage of Kraft Foods with an outperform rating and a target of $35. Credit Suisse believes the risk-reward is attractive because of potential upward momentum in operating margins over the next 12 months, fueled by acquisition synergies. Firm says investors are not giving the company any credit for the $675 million in cost synergies from Cadbury much less the potential for revenue synergies. Currently, Kraft's stock is trading for 1 times sales, 1.6 times book of $17.57 a share, and a PE of 14 times this years numbers and 12.5 times next years earnings. Kraft is a good selection for conservative investors that like dividends with a dividend payment coming up next month.