From 2004 to the close of the third quarter of 2009, Bill Ackman's Pershing Square hedge fund returned a whopping 348%. In the same period, the S&P 500 fell slightly. So should intrepid investors dive into Ackman's latest pick?

Following well-publicized bets on Target (NYSE: TGT) and General Growth Properties, Ackman has recently spotted deep value in packaged-foods producer Kraft (NYSE: KFT). Boring, one might claim -- but so are shopping malls. Yet Ackman's General Growth investment has appreciated nearly 20-fold.

At best, I've been lukewarm on Kraft. However, Ackman does present a compelling investment thesis.

First off, the hedge-fund manager points out that there is currently little sell-side coverage of Kraft, since major institutions such as Citigroup (NYSE: C), Morgan Stanley (NYSE: MS), and Goldman Sachs (NYSE: GS) are advising on the Cadbury acquisition. Until the Street can break its silence, well-researched valuation models will remain in short supply, in turn depressing Kraft shares as would-be investors pace the sidelines.

And "depressed" is exactly the word. Cadbury's sweetness aside, Ackman argues that Kraft's stand-alone business is underappreciated. Key to his thesis is the prospect of stronger brands and improved margins. On the former point, the majority of products in Kraft's portfolio hold the No. 1 market-share position. In recent years, management has spent plenty of dough to improve product quality, yet Ackman sees additional opportunities to strengthen brand equity.

Regarding profitability, Ackman notes that Kraft's operating margin lags that of nearly every major industry player, including Campbell Soup (NYSE: CPB), Kellogg (NYSE: K), Nestle, and Unilever. However, Kraft is targeting a mid-teens operating margin by 2011 (up from 13.8% in 2009), driven by stronger sales of higher-margin products, improved product value, and supply-chain efficiencies, among other factors.  

Then, of course, there's Cadbury -- soon to be the creme de la creme of the combined company. I've previously profiled many of the Cadbury strengths that Ackman cites, but he goes a step further, reminding investors that Cadbury, like Kraft, is only now emerging from a period of heavy supply-chain and brand investments. As associated costs recede and efficiencies come online, margins should expand, creating substantial value for the combined entity.

Estimating 2012 earnings per share of $2.70 to $2.90, which in turn fetch a price-to-earnings multiple of 15 to 17, Ackman sees Kraft shares at $41 to $49 in two years. Including dividends, that represents a total return in the neighborhood of 50% to 80%.  

Ultimately, Ackman's thesis doesn't offer groundbreaking insight. Rather, he simply provides additional data to support strategies and financial targets that Kraft management has, for the most part, already laid out. That in itself shouldn't diminish his analysis, although I would argue that he presents a best-case scenario.

For example, despite improvement, more than half of Kraft's U.S. retail revenue comes from products that are still losing market share. Furthermore, even though Kraft now offers healthier versions of such classic products as Velveeta and CapriSun, it lacks the truly innovative health/nutrition focus that is driving growth for competitors. In fact, Kraft recently jettisoned its Balance Bar line. If consumer preferences continue to grow in favor of functional foods, Kraft could end up the industry laggard.

Kraft certainly isn't a bad investment. But Ackman could be overly optimistic on this one.

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Fool contributor Mike Pienciak holds no financial interest in any company mentioned in this article. Try any of our Foolish newsletter services free for 30 days. The Fool has a disclosure policy.