Kraft Foods Retained at Neutral - Analyst Blog

On Jul 9, we maintained a Neutral recommendation on Kraft Foods Group, Inc. (KRFT) despite solid first-quarter results as we await a more sustained improvement in top line.

Why the Neutral Recommendation?

On May 2, 2013, Kraft Foods announced solid first-quarter 2013 results beating the Zacks Consensus Estimate for both revenues and earnings on the back of solid innovation and stepped-up advertising spend behind its biggest brands.

Adjusted earnings of this consumer packaged food and beverage company stood at 88 cents, flat year-over-year as gains from strong top-line growth and cost savings were offset by high interest expense and increased share count. Both total and organic revenues grew 2.1% in the quarter driven by volume gains, improved product mix and favorable Easter timing which offset headwinds from lower pricing and product pruning.

Kraft Foods' adjusted operating income (excluding restructuring charges) increased 16.6% in the first quarter. The increase was driven by volume gains, improved product-mix and strong productivity gains and cost savings making up for double-digit increase in the advertising costs. The company also stood by its full-year 2013 outlook and expects to invest its cost savings more heavily on brand building investments in upcoming quarter.

Overall, we are encouraged by Kraft Foods' aggressive cost-reduction and efficiency-improvement initiatives which will provide more cash to invest in stronger 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, though Kraft Foods' first-quarter top-line performance and cost-savings efforts look encouraging, it needs to show sustained improvement in the top line. Moreover, challenging industry conditions and lack of exposure outside the U.S. also keep us on the sidelines.

Other Stocks to Consider

Kraft Foods carries a Zacks Rank #2 (Buy). Other stocks in t! he food industry that are currently performing well and have a bright outlook include Flower Foods Inc. (FLO), Campbell Soup Company (CPB) and B&G Foods Inc. (BGS). While BGS and FLO carry a Zacks Rank #1 (Strong Buy), CPB carries a Zacks Rank #2 (Buy).