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Kraft Foods started the year on a strong note with adjusted earnings of 57 cents per share, exceeding the Zacks Consensus Estimate by a cent and the prior-year quarter earnings by 5 cents per share. Solid top-line growth and effective cost management boosted earnings in the quarter. Revenues in the quarter rose 4.1% to $13.1 billion, in line with the Zacks Consensus Revenue Estimate.
Organic revenues were up 6.5%, driven mainly by pricing gains. New product launches and impressive growth of Power Brands also added to the top line increase. Adjusted operating income surged 5.8% to $1.85 billion in the quarter, driven by effective cost management and volume/mix gains, which offset the negative impact from increased input cost and advertising spend. Kraft reaffirmed its previously provided constant currency revenue and earnings guidance.
Kraft Foods is one of the largest branded food and beverage companies in the US and the second largest in the world. Among the 80 brands in its portfolio, 12 Kraft products generate revenues in excess of $1 billion.
Kraft’s well performing strong-margined core brands have been christened Power Brands. Power Brands grew 8% in 2011 to boost top-line growth. We believe these brands will continue to drive growth in 2012.
The company is also expanding into key developing markets such as China, Brazil, India, Mexico, Russia and Southeast Asia, encouraged by the high-growth nature of these countries. In 2011, the developing market was the strongest performing segment for the company and is expected to be the key growth driver in 2012.
Moreover, the acquisition of Cadbury in 2010 placed Kraft in higher growth geographies and categories. Cadbury has opened new sales channels for the company through its vast distribution networks in developing markets such as India, Brazil and Mexico.
Despite weak macroeconomic conditions, the company has consistently delivered positive top and operating income growth in its European segment. The first quarter of 2012 was Kraft Foods’ ninth consecutive quarter of sales and operating profit growth in Europe despite severe economic challenges. The better than peer performance in Europe reflects the strength of the company’s products and categories and strong momentum of its Power Brands.
Kraft Foods plans to separate into two independent public companies: a global snacks company and a North American grocery company. The decision is expected to help the company expand its global presence, besides giving investors a chance to bet on a snacks business that is growing fast in the emerging markets, or opt for the stable dividends offered by a slower-growing general grocery business that includes Oscar Mayer meats and Kraft cheeses.
However, we remain concerned about rising input costs and the slow economic recovery. The rising prices of commodities have limited Kraft Foods’ pricing policies, thereby squeezing its profitability. Overall, we expect commodity costs to continue to be volatile and increase overall in 2012. Further, though the overall economy is recovering, the process is relatively slow. Slow job growth, high interest rates and still-tightened credit availability continue to hurt costumer discretionary spending.
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