Shares of Kraft Foods
How it got here
It isn't the best time to be a food producer, with many reeling from rising input prices, but Kraft Foods has managed to shrug off higher raw material costs thanks to its product diversity and ability to raise prices.
Kraft's diverse product portfolio is a large reason the stock is trading at new highs. While both Kellogg
In addition to the stability of Kraft's business and its 2.9% yield, investors appear to be excited about Kraft's impending split of its grocery business from its snack foods operations. The split, which is expected to happen this year, should offer shareholders better returns as the slower-growth grocery line should cater to income-seeking investors while the snack division will cater to those looking for stronger growth opportunities in the food sector.
How it stacks up
Let's see how Kraft Foods stacks up next to its peers.
Outside of Diamond Foods
Source: Morningstar; yields are projected, *Diamond's dividend is currently suspended.
Remember not to be fooled by Diamond's cheap metrics because that company is currently under investigation by the SEC. It's also worth noting that Kellogg's recently lowered its earnings expectations for the remainder of the year due to weaker-than-expected sales. In terms of value, this really is a run-away race between H.J. Heinz and Kraft.
One differentiating factor above is Heinz's higher yield right now, but I suspect that will change once Kraft splits into two separate businesses. The big difference I see between the two is that Kraft offers a marginally better five-year estimated growth rate, lower debt-to-equity, and a lower payout ratio than Heinz, making it a better value in my eyes.
Now for the real question: What's next for Kraft Foods? That question is really going to depend on whether the company can continue to pass along the rising costs of its goods to consumers and if it can truly maximize shareholder value with buybacks and dividend payments with its upcoming operations split.
Our very own CAPS community gives the company a four-star rating (out of five), with an overwhelming 94% of members expecting it to outperform. Consider me one of the 94%, as my CAPScall of outperform on Kraft is current up three points, and don't look for me to close this pick anytime soon.
The key catalyst to Kraft's growth is the splitting of its business, which should net investors a bigger dividend and more refined growth (whether you want stable grocery brands or higher-growth snack foods). I also feel that with Kraft having a presence in the dessert, snack, and full-meal areas of the food sector, it is shielded well from input price hikes, and it also maintains incredible pricing power. Finally, favorable sugar and chocolate prices should, in the near term, benefit the stock in the form of better margins. This stock still looks like a sweet deal for investors.
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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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