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We expect the food company, Kraft Foods Group, Inc, (KRFT - Analyst Report), to beat expectations when it reports second-quarter 2013 results after market closes on Aug 1.

Why a Likely Positive Surprise?

Our proven model shows that Kraft is likely to beat earnings because it has the right combination of two key ingredients.

Positive Zacks ESP: Expected Surprise Prediction or ESP (Read: Zacks Earnings ESP: A Better Method), which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is at 10.45%. This is very meaningful and a leading indicator of a likely positive earnings surprise for shares.

Zacks #3 Rank (Hold): Kraft carries a Zacks Rank #3 (Hold). Note that stocks with Zacks Ranks of #1, 2 or 3 have a significantly higher chance of beating earnings. The Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.

The combination of Kraft’s Zacks Rank #3 (Hold) and 10.45% ESP makes us very confident about a positive earnings beat on Aug 1.

What is Driving the Better-Than-Expected Earnings?

Volume growth on the back of solid innovation and stepped-up advertising spend behind its biggest brands is expected to boost revenues in the fourth quarter for this packaged food/beverage company. This combined with aggressive cost reduction and improved efficiency is expected to lead to a positive earnings surprise in the upcoming quarter.

The positive trend is seen in the trailing three-quarter average surprise of 41.0%, including a 16.9% surprise in the last-reported quarter. This was possible because of the better-than-expected top-line performance. Kraft’s cost savings outpaced brand reinvestments playing an important role in driving results.

Other Stocks to Consider

Here are some other companies in the consumer staples sector that can be considered as our model shows that they have the right combination of elements to post an earnings beat this quarter:

  • Sanderson Farms, Inc. (SAFM - Snapshot Report), Earnings ESP of +5.66% and a Zacks Rank #1 (Strong Buy)
  • Tyson Foods, Inc. (TSN - Analyst Report), Earnings ESP of +8.62% and a Zacks Rank #2 (Buy)
  • Pilgrim's Pride Corp. (PPC - Snapshot Report), Earnings ESP of +3.57% and a Zacks Rank #2 (Buy)

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