The recently acquired Cadbury put some real kick in packaged-foods producer Kraft's (NYSE: KFT ) first-quarter results. The true surprise, however, may be just how well the Kraft "base business" performed -- on both the top and bottom line.
On a reported basis, net revenue from continuing operations shot up 26%, to $11.3 billion, with the Cadbury acquisition contributing the bulk of the gain. Meanwhile, organic net revenue for the combined company -- which excludes the effects of currency, acquisitions, and divestitures -- climbed nearly 4%. Notably, the Cadbury business grew at more than twice that combined rate.
Even so, the 3.3% organic revenue growth posted by the Kraft base business beats out the similarly measured recent results of snacks-and-cereal maker Kellogg (NYSE: K ) and fellow competitor General Mills (NYSE: GIS ) . In the broader world of consumer staples, however, Colgate-Palmolive (NYSE: CL ) , Procter & Gamble (NYSE: PG ) , and Unilever (NYSE: UL ) all recently turned in superior performances.
While that's all fine and dandy, it's arguably more important that the Kraft base business saw volume/product mix drive the overwhelming majority of organic sales growth, even while management impressively nudged pricing upward. By contrast, P&G was forced to give ground on prices, as was Clorox (NYSE: CLX ) .
In the long term, management sees volume/product mix contributing roughly two-thirds of its projected 5%-plus annual organic revenue growth. That sounds great, but the doubter in me wonders how much that estimate refers to the faster-growing categories and geographies that Cadbury brings to the company, versus what could be the Kraft base business's future struggle to raise prices in the face of growing commodity costs.
For now, however, profitability looks solid. I know that on a reported basis, the quarter was a nightmare -- earnings per share of $0.15, versus the year-ago $0.45. However, when we strip out items mostly related to the Cadbury acquisition, adjusted EPS shows nearly 20% growth, with the base Kraft and Cadbury businesses chipping in gains of $0.08 and $0.07, respectively.
Don't get me wrong -- the integration of Cadbury is costing real money, which shouldn't be overlooked. But I do believe that adjustments such as those above offer investors a valuable glimpse at the sort of results that this newly formed behemoth might be capable of sustainably churning out in another few years.
I've been skeptical of Kraft's ability to digest Cadbury while also attending to its base business. Apparently, I haven't been the only one: CEO Irene Rosenfeld acknowledged such concerns on the conference call. And for the time being, I begrudgingly agree with the overpaid Rosenfeld: It does appear that Kraft can, as she put it, "walk and chew Trident at the same time."
All of which means that I'm ever so slowly warming up to hedge fund honcho Bill Ackman's notion that Kraft shares could reasonably touch $49 a pop in two years' time. From today's $30 level, that's a more than 60% gain.
For that kind of return, I'd walk, skip, and cartwheel, all while chewing Trident and dunking Oreos.