News out this morning that Kraft Foods, Inc. (KFT) has been chosen to replace American International Group (AIG) as a member of the Dow Jones Industrial Average sent its shares higher. Investors rushed to get into the stock ahead of its formal inclusion in the widely followed benchmark on September 22.
Or, could it be that investors are just seeking a safe haven for their money in the wake of all the turmoil in the financial markets? Undoubtedly, a little of both. It seems the stock being included in the major average always goes up whenever a major announcement like this is made. After all, index funds and other institutional investors will have to buy massive amounts of shares – there’s no two ways about it, but the euphoria usually subsides after a week or so.
Investors Hungry for Kraft
At that point it will be back to business as usual as investors weigh risks and rewards as they gauge the economy and the direction for stocks. Ultimately it is the fundamentals of a stock that really matters and determine price in the market. Current market conditions suggest this is a great time to own shares of KFT and other so-called defensive issues like Procter & Gamble (PG) and Johnson & Johnson (JNJ). These boring, usually with low growth potential, stocks may not offer the upside of an AIG (AIG), Goldman Sachs (GS), or Morgan Stanley (MS), but the reverse is also true (see also, “Will Goldman Sachs Be Next?“).
It is quite unlikely that you will ever see KFT lose half its value in a day. If so we are all in a boatload of trouble. Kraft is one of the world’s great food companies. Chances are you buy their products on every trip to the grocery store. The company has nine brands that enjoy over $1 billion in revenue – brands so ubiquitous you probably don’t even think of them as Kraft. These brands include Maxwell House coffee, Oreo cookies, Philadelphia cream cheese, Oscar Mayer meats and Nabisco cookies and crackers are just some of the items that fill your pantry or fridge.
As the current economic downturn turns worse Kraft’s sales should spike as consumers rein in discretionary spending and prepare more meals at home. Dining out is expensive and KFT is positioned to benefit from a return to in-home dining (see also, “Consumers Spending More Time in The Kitchen“). Running a business the size of Kraft isn’t easy and delivering consistent, steady earnings takes hard work. KFT still needs to innovate, create new products, find new markets, increase market share in existing ones and by all means don’t disappoint Wall Street while you do it.
To that end, the company believes its international division, Kraft International, will be a key driver of growth going forward. Kraft International has honed its focus to concentrate on core categories, brands and geographies. Instead of trying to be all things to all people and planting the flag all over the world, Kraft has decided that ten of the company’s brands will support a push into categories such as Biscuits, Chocolate, Powdered Beverages, Coffee and Cream Cheese.
Ten markets will see this big push including four of the biggest markets primed for growth such as China, Brazil, Russia and Southeast Asia as well as six other “scale markets” including the U.K., Germany, Italy, France, Spain and Australia. KFT says it will earn $2 per share in fiscal 2009, which sounds perfectly pedestrian for a $33 stock.
In an uncertain market like this one, owning KFT makes a ton of Rational sense.
