Kraft or Mondelez: Whose Future Is Tastier?

What their first earnings reports as separate outfits reveal

In the summer of 2011, corporate giant Kraft Foods (NASDAQ:KFT) surprised Wall Street by announcing that it would split itself in two. One company, which would keep the current moniker, would operate $16 billion North American grocery business and  include iconic brands like Kraft Macaroni & Cheese, Oscar Mayer meats and Maxwell House coffee.

The other company would be tagged with a Latin-sounding name, Mondelez International (NASDAQ:MDLZ), and it would consist of the $32 billion global snack business that includes tasty brands such as Oreo cookies and Trident gums, as well as the numerous brands that came with the 2010 Cadbury acquisition.

Fast forward to this week, and we have the first earnings reports from each company since their split became official on Oct. 1. Let’s take a look at their numbers and outlooks going forward. Then we can assess which company’s shares represent the better option for investors.

Kraft Foods: Strong Sales and a “Burning Platform”

Things were good in the North American grocery business during Q3, and Kraft’s numbers confirm that. The company weighed in with strong third-quarter results that bested consensus estimates. The seller of the iconic Kraft Singles American cheese brand saw net income spike 13% to $470 million, or 79 cents a share. That’s a substantive gain from the $417 million, or 70 cents per share, the company logged in the same quarter a year ago.

Revenue also came in strong, gaining 3% to $4.61 billion, firmly above the consensus forecast of $4.55 billion during the quarter.

Perhaps more important, Kraft affirmed its 2013 earnings forecast of $2.60 a share. I say more important, because there’s a growing fear that revenue and earnings during 2013 will come under pressure due to continued sluggishness in the U.S. economy and persistently high headline unemployment figures of between 7% to 8%.

To combat what it sees as a tough U.S. economy, Kraft plans to increase sales by boosting advertising and offering more products at reduced prices. In a conference call following the earnings release, Kraft Chief Executive Tony Vernon said, “You have to be able to offer price points and innovation in all segments.”

Vernon also said the company needs to improve its Maxwell House coffee, Planters nuts and Jell-O brands. He added: “The economic environment has not improved and that creates a burning platform for Kraft, our customers and our industry.”

That burning platform could be the reason why Kraft is predicting flat to lower revenue in the fourth quarter compared to the prior year. Still, the confirmation of the 2013 growth is good news for the company and its shareholders.

Mondelez: Gumming Up Brazil and Hit by a Strong Buck

Like Kraft, Mondelez International actually bested analyst expectations for the third quarter. Unlike Kraft, it saw a marked decline in Q3 net income. The maker of Oreos and Trident, as well as brands under the Cadbury and Nabisco names, suffered a bit from the negative currency effects of a strong U.S. dollar.

For the quarter, net income declined to $652 million, or 36 cents per share. That’s a 29% drop compared to the $922 million, or 52 cents per share, the company earned in the same quarter a year ago. Revenue in the quarter also slid, by 2% to $12.9 billion from $13.3 billion. Mondelez cited a stronger greenback, which tempers the value of international sales, as responsible for a revenue drop of 4.5 percentage points.

In the conference call following the Mondelez earnings release, CEO Irene Rosenfeld commented that revenues were hit from a lack of price increases compared to last year, and due to what she said were “short-term executional missteps.”

One of those missteps occurred in Brazil, where Mondelez had a hard time adjusting to, of all things, a slowdown in gum purchases. It actually shipped too much gum to Brazil, apparently not taking into account the decreased demand in the country.

Mondelez also stumbled in Russia, where a failure to react to lower coffee and chocolate prices gave rivals in the region a leg up. Rosenfeld told conference call attendees that the company now has made the appropriate price adjustments, but that move came a bit too late to avoid a revenue bite.

Now, despite the revenue slowdown and the missteps in Brazil and Russia, Mondelez did see stronger sales in major growth markets such as China, India, the Middle East and Africa. As you can imagine, European revenue came under pressure, as that area has been in virtual recession for most of the year. However, revenue in North America rebounded, with a 1.9% increase in Q3 sales.

Like Kraft, Mondelez reiterated its earnings forecast, which currently stands at $1.50 to $1.55 per share with revenue growth in the 5% to 7% range.

Slow Growth vs. Potential Growth

The bottom line here is that both Kraft and Mondelez had solid showings during the quarter. Despite Mondelez’ decline in net income, and its stumbles in Brazil and Russia, the company is seeing growth in many of its most important markets. Moreover, both companies have affirmed their forecasts going forward, even though many see a tough U.S. — and global — economic environment.

I suspect that for Kraft, slow growth in North America will keep it from sustaining anything close to blowout earnings in 2013. For investors, this means the stock will probably give you some modest price appreciation going forward.

Mondelez faces many more exogenous factors that could lead to either a big surge in the share price, or a sizable pullback. But I also think that given the strength of its brands worldwide, the prospects for revenue and earnings growth are much higher than for Kraft. I also think if the value of the U.S. dollar resumes its long-term decline, that Mondelez will erase that currency hit to its bottom line. If that happens, the potential upside for MDLZ shares will indeed be very tasty.

At the time of publication, Jim Woods held no positions in any of the stocks mentioned in this article.

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