Kraft Foods Inc. (KFT) posted first quarter 2011 operating EPS of 52 cents a share, which was well above the Zacks Consensus Estimate of 47 cents by 10.6%.
Management credited the benefits of increased investments behind the Power Brands, strong productivity and disciplined cash management. Also the company is said to have been making good progress in capturing the synergies from the Cadbury acquisition.
Highlights From The Quarter & Year
Revenues in the quarter soared 11.1% to $12.5 billion, while organic growth was 4.6% driven by strong top-line growth in all regions. Pricing accounted for 3.7 percentage points of growth and volume and mix contributed 0.9 percentage points. However, Easter-related shipments partially offset the growth by 1.5 percentage points.
Revenue grew in each of the geographies with the Developing Markets leading the race with an increase in revenue of 24.0%. It was followed by an increase of 11.3% in Europe and 4.4% in North America.
As on December 31, 2010, Kraft Foods had $2.09 million of cash and cash equivalents compared with $2.48 million at the end of year 2010.
New Investments
Kraft has recently invested approximately $200 million for expansion in Brazil. Out of which $80 million was invested in a manufacturing facility that is initially expected to produce chocolate and powdered beverages. The company also expects to add a biscuit line by fiscal 2012.
The Way Forward
Kraft is stated to drive confidence from the belief of continuing strong business momentum in the challenging environment of weak consumer and category growth as well as significant input cost inflation.
The confidence is thus reflected in its 2011 outlook and the company expects to have an organic net revenue growth of at least 5%, or roughly 4% after excluding the impact of accounting calendar changes. Management expects the operating EPS growth in the range of 11-13%.
Zacks Consensus Estimate projects the EPS for next year to be $2.20 and revenue to be $52.4 billion.
Conclusion
Estimates for the quarter had been stable in the run-up to the earnings release, though one analyst gave a negative revision in the last 7 days.
We believe, over the past four to five quarters, the strong dollar and volatile commodity markets, especially dairy, had affected the top and bottom lines of the company. However, the company has implemented several turnaround plans to increase profitability, and revive organic growth.
The company has also strengthened its business model by increasing investments in promotion and marketing that increased its pricing power and improved product positioning. These initiatives are paying off now, and margins are improving.
Furthermore, the combination of Kraft Foods and Cadbury is expected to provide meaningful revenue synergies. The combined company expects long-term organic net revenue growth of more than 5%.
Kraft currently has a Zacks #3 Rank which translated into short-term Hold rating. On a long term basis we are Neutral on the stock.
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