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On Sep 27, we maintained a Neutral recommendation on Kraft Foods Group, Inc. (KRFT - Analyst Report) following mixed second-quarter results.

Why the Neutral Recommendation?

On Aug 1, 2013, Kraft Foods announced mixed second-quarter 2013 results beating the Zacks Consensus Estimate for earnings but missing the same for revenues.

Second-quarter adjusted earnings of 85 cents per share declined 22% year over year due to weak top line, lower profits and high interest expense. Adjusted earnings, however, beat the Zacks Consensus Estimate of 67 cents by 26.9%. We believe that Kraft’s higher-than-expected productivity savings contributed to the earnings beat.

However, sales declined 1.1% and also missed the Zacks Consensus Estimate due to lower volume and pricing, and headwinds from an early Easter and product pruning. Adjusted operating income also declined almost 10% as strong productivity gains and cost savings were offset by higher marketing expenses and unfavorable volume/mix.

Moreover, Kraft lowered its full year 2013 organic revenue guidance due to soft revenues in the second quarter. Encouragingly, however, accelerated advertising investments are expected to drive sales in the second half.

Overall, we are encouraged by Kraft’s aggressive cost-reduction and efficiency-improvement initiatives which will provide more cash to invest in innovation, brand building and marketing initiatives. Kraft Foods also aims to maximize cash flows which will be used to pay strong and competitive dividends.

However, despite Kraft’s cost-saving efforts consistently boosting earnings, it needs to show sustained improvement in the top line. Moreover, increasing competitive pressures, challenging industry conditions and a lack of exposure outside the U.S. keep us on the sidelines.

Other Stocks to Consider

Kraft carries a Zacks Rank #3 (Hold). Other stocks in the food industry that are currently performing well and have a bright outlook include Pinnacle Foods Inc. (PF - Snapshot Report), Green Mountain Coffee Roasters, Inc (GMCR - Analyst Report) and Treehouse Foods, Inc. (THS - Snapshot Report). While PF and GMCR carry a Zacks Rank #1 (Strong Buy), THS carries a Zacks Rank #2 (Buy).

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