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Coverage Initiation: Kraft Foods Group
Value Line recently initiated coverage of Kraft Foods Group (KRFT) in its flagship product, The Value Line Investment Survey. The company was spun off from Kraft Foods Inc., which now operates under the name Mondelez International (MDLZ). The parent company was founded in the Chicago area, where its headquarters remain today, in 1903. The newly-minted Kraft Foods Group employs 126,000 workers and consists of the North American grocery businesses of its former partner, including, among others, Maxwell House, Oscar Mayer, and, of course, the eponymous Kraft – each of which generates more than $1 billion in annual revenues.
The organizational split should favor both companies, allowing them to better focus and maximize profits from distinct business models. Mondelez, with its snack and candy brands, operates under a different buying cycle, as these types of goods are generally purchased in inconsistent and irregular cycles; Kraft Foods sells its grocery products on a weekly basis. That is, with separate distribution practices, structures, and operating models, the spinoff will allow Kraft to better cater to its distinctive growth profile. Already, the company holds a leading position in several categories, from meats to cheese to beverages.
The company will also look to drive earnings growth through innovative new products and the extension of its existing brands into new categories. Velveeta, for one, now bears its name on a line of skillet dinners, while Philadelphia cream cheese will also release a line of cooking sauces. By constantly refocusing its brands, Kraft has established itself as a standard-bearing grocery company. We believe this approach also helps position the company strongly to remain a force in the grocery business well into the future.
By and large, Kraft has been vigilant in keeping up with trends in the food industry. Its Tassimo coffee platform caters to the single-serving K-cup machines. The wholly new product Mio makes concentrated drinks that turn a glass of water into a flavored beverage of the consumer’s choosing – an innovation that fits squarely in the spectrum of convenient, “on-the-go” products like energy drinks, energy shots, and its own brand Crystal Light’s flavor packets.
The next year or two will be largely devoted to minimizing overhead and covering expenses related to the spinoff. With the brand loyalty associated with many of the products in Kraft’s portfolio, especially its standard-bearing macaroni and cheese, the company should have little problem maintaining, and eventually expanding, its market share. In the meantime, the quarterly dividend (currently at $0.50) and above-average yield will help to cheer shareholders as the newly-formed company reins in its margins for the long run. Also of note: the company has the potential to be a cash cow, so share buybacks and/or additional measures could increase the equity’s longer-term appreciation potential, which would invariably benefit investors.
Subscribers interested in owning a piece of the newly-formed grocery giant are advised to consult Value Line’s quarterly reports for Kraft Foods Group, as well as any supplemental reports and relevant articles as important news items arise.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.