On Jan 2, we maintained our Neutral recommendation on Kraft Foods Group, Inc. as we have faith in the company’s long-term fundamentals despite its struggling top line.
Why the Neutral Recommendation?
Kraft has been struggling with its top line ever since the split from Mondelez International, Inc. (MDLZ - Analyst Report).
In the last reported quarter (third-quarter 2013) Kraft’s net revenue declined 4.2% year over year due to the weak consumer demand and tough volume comparisons and also missed the Zacks Consensus Estimate. Several of the company’s product categories have been soft for the last two quarters due to lower consumption and increased competitive activity. The salad dressings, powdered beverages and ready-to-eat desserts categories were particularly under pressure.
Kraft’s third-quarter adjusted earnings of 65 cents per share also fell short of the Zacks Consensus Estimate and declined year over year due to weak top line, higher interest expense and tax rate. Estimates largely moved downwards after the company reported dismal third-quarter results.
Moreover, increasing competitive pressures, challenging industry conditions and a lack of exposure outside the U.S. add to the woes.
However, the company has strong fundamentals. 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.
Other Stocks to Consider
Kraft carries a Zacks Rank #3 (Hold). Other better-ranked stocks in the food industry include The Hain Celestial Group, Inc. (HAIN - Analyst Report) and Green Mountain Coffee Roasters, Inc. (GMCR - Analyst Report). Both the companies carry a Zacks Rank #2 (Buy).