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Should I Buy Kraft? 3 Pros, 3 Cons

For the first quarter, Kraft (NYSE:KFT) continued to show strength. Earnings came to $813 million, or 46 cents a share, up from $799 million, or 45 cents a share. Revenues rose by 4.1%, to $13.09. Yet the stock price was essentially unchanged on the news.

So far this year Kraft has posted a nice gain of 6.7%. This comes after a return of 22% last year.

So should you buy Kraft stock? To decide, let’s take a look at the pros and cons:

Pros

Global Footprint. Kraft is the world’s No. 2 food company. It sells its product in 170 countries. Some of the brands include Trident gum, Oreo cookies, Oscar Mayer meats, Kraft cheeses and Maxwell House coffees. With its acquisition of Cadbury, Kraft picked up great brands such as Bubblicious, Dentyne, Eclairs and Halls.

Brand-Building. Kraft has been ramping up expenditures on marketing and adverting. While that means lower margins, at least in the short-run, these outlays are critical. Already, Kraft is seeing better performance in Europe. Keep in mind that other companies in the region — including Kellogg (NYSE:K) — have also had problems.

Payday. Kraft is involved in an arbitration suit with Starbucks (NASDAQ:SBUX) regarding the termination of their distribution partnership. Kraft is seeking a whopping $2.9 billion. No doubt, this would be a windfall. Yet it’s never easy to predict the outcome of legal battles.

Cons

North America. The sluggish U.S. economy continues to be a drag on Kraft. In the first quarter, sales volume in North America fell by 2.8%. As the company has raised prices, consumers have looked for cheaper alternatives, such as private-label products.

Costs. As a massive buyer of commodities — including wheat, corn and sugar — Kraft has continued to be negatively impacted by rising prices. The company has tried to find efficiencies and even pass along cost increases to its customers, but these are far from ideal strategies.

Kraft also must deal with its dependence on a small number of distribution partners, such as Wal-Mart (NYSE:WMT), Kroger (NYSE:KR) and Safeway (NYSE:SWY).

Valuation. Kraft trades at a price-to-earnings ratio of 19. In other words, the stock price does not look like a bargain, especially considering the difficulty of finding more growth Kraft’s mature markets.

Verdict

Kraft’s marketing efforts are likely to gain more traction over the next couple of quarters, which should especially help the North America market. The company is also in the process of splitting off its global snacks business (the entity will be called Mondelez Internatinal). This should allow for more focus and less bureaucracy.

However, all these things seem to be discounted in the stock price, which is currently at a reasonable value. So all in all, the cons outweigh the pros for investors.

Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “The Complete M&A Handbook”, “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2012/05/should-i-buy-kraft-3-pros-3-cons/.

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