Depending on how you slice third-quarter results, packaged-foods icon Kraft
Starting with the top line, sales were soured by unfavorable currency movements and lost business related to a divestiture. All told, net revenue slipped 5.7% year over year to $9.8 billion. That number was lower than analysts had expected, and it also represented a sequential decline.
Organic sales (which exclude currency and restructuring effects), conversely, were higher by 0.5%. However, some analysts felt that even this metric was on the soft side. In defense of Kraft, lower prices lopped roughly 1.6% off of sales growth. And rather than some last-ditch attempt to woo consumers through product discounts, the move reflected the company's "adaptive pricing model" in its U.S. Cheese business. In this case, that meant passing along markedly lower dairy costs.
Skeptical? OK, but consider that operating income in Kraft's U.S. Cheese segment climbed by double digits, even as revenue fell. In other words, higher volume and improved product mix more than offset what might be described as misleading segment sales.
Moreover, total volume/product mix (Kraft reports these metrics as a single figure) rose 0.7%, a substantial improvement over the prior quarter's paltry 0.2% gain. That compares to a similar volume performance for cereal-and-snacks maker Kellogg
Other Kraft businesses fared worse. As a whole, the North American Foodservice segment -- responsible for roughly 10% of 2008 net revenue -- was still weak. Management attributed anemic results to low casual-dining traffic. Certainly, the restaurant industry slump is no secret to Brinker International
I know, I know, let's hurry up and get to the bottom line. At first, earnings-per-share growth looks phenomenal, leaping to $0.55 from $0.34 in the year-ago period. However, only $0.09 per share of that increase owed to operating gains, with the remainder stemming from items such as hedging activities, lower taxes, and restructuring charges.
Ultimately, the core business grew EPS by a still-impressive 26.5%. But investors might consider that a lower cost of goods sold -- the direct cost of producing finished products -- pitched in $0.56 per share. No doubt a now-completed restructuring program contributed toward production efficiencies, but it's prudent to wonder to what degree lower commodity prices boosted gross margin. In the future, commodity-driven gains might not be repeatable.
Limited by U.K. law, management couldn't say much about its ongoing pursuit of leading global confectioner Cadbury
At a forward P/E of 12.5, shares might be cheap. However, investors who aren't willing to stomach possible acquisition-related pains could do best to wait on the sidelines.
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