Inside Wall Street: Kraft remains undervalued
Despite the stock's rise after spinoff news, the large packaged-food company holds more upside potential.
When change happens, there's opportunity -- or the devil to pay.
In the case of Kraft (KFT), opportunity beckons more than trouble. The devil may be in the details, but the bonanza is still in owning the stock.
Before year's end, Kraft plans to spin off to shareholders its North American grocery business, which will retain the world-famous Kraft brand. The parent company will retain the global snacks business, including coffee and powdered drinks, and will be named Mondelēz International.
The spinoff should be a welcome gift to shareholders, although, predictably, not everyone thinks so. But there's more positive than negative in the proposed change, and Kraft's current shareholders and investors still mulling the ifs and buts of the pending split should welcome the major change. To repeat: The spinoff represents a significant break for shareholders.
A global leader in food and beverages, Kraft manufactures and markets worldwide packaged food products, including snacks, beverages, cheese, convenient meals and various grocery items. Among its widely recognized products are Kraft macaroni and cheese, Oscar Mayer, Oreo, Tang, and Milka.
Shares of Kraft climbed about 13% since the spinoff was announced on Aug. 4 to a 52-week high of $39.06 a share on Feb. 2. Shares were trading at $37.11 Thursday afternoon. The real worth of the spinoff deal remains underappreciated, analysts say.
The bulls believe the current Kraft stock to be worth as much as $42 to $45 a share, but more to the point of the spinoff, shareholders will end up owning two stocks: Mondelēz, which will trade under the symbol "MDLZ," and the spun off Kraft. This is sort of a bargain deal of buy one, get one.
The parent stock and the spinoff are expected to trade on a when-issued basis two days before the record of the deal, which has yet to be announced.
"We view the planned year-end spin as a positive for the stock," says Joseph Cornell, president of Spin-Off Advisors in Chicago. He sees Kraft gaining from its above-average exposure in the emerging markets and its dominant presence in high-growth categories, such as confectionery, and potential synergies from the integration of Cadbury, which it acquired in early 2010.
He notes that Kraft's North American results, "already benefiting from robust pricing and higher (product) innovation, are expected to remain strong as input cost inflation moderates in 2012."
Another analyst notes that Kraft's higher-margin core brands continue to gain momentum. Sales of its top "power brands" improved 8% in 2011, driven by strong growth across all divisions, says Kenneth B. Zaslow, analyst at BMO Capital Markets. "Kraft continues to transform itself into a top-performing food company and has successfully navigated the challenging environment (high unemployment, low consumer confidence, and high commodity costs) that has created many roadblocks for its peer group," Zaslow adds. He rates the stock as outperform.
The parent Mondelēz Global Snacks will include the current Kraft Foods Europe and Kraft Foods Developing Markets units, as well as the North American snacks and confectionery brands. The grocery spinoff will consist of the current U.S. beverages, cheese, convenient meals, and grocery segment, plus the non-snack categories in Canada and NA Food Service unit.
"We have a generally favorable view of Kraft's planned split into two public companies," says Tom Graves, analyst at S&P Capital IQ. He notes that the snack business has better long-term growth prospects and that the grocery business "would be more of a dividend payer." Right now, Kraft, with a market capitalization of $67 billion, pays a dividend yield of 3%.
He also sees Cadbury as providing a strategic value for Kraft, including the opportunity to boost its presence in the developing international markets and accelerate the company’s growth prospects. He has a "hold" rating on the stock to reflect some caution, like other skeptics, related to the "implementation and results of the planned split-up."
However, several analysts have an upbeat view of the spinoff and Kraft's prospects. "Kraft continues to be a top pick for 2012 (currently No. 5 on our consumer Staples 'Favorites' list)," says Andrew Lazar, U.S. food analyst at Barclays Capital. "We continue to believe its shares can appreciate from here," says Lazar, who rates the stock as overweight, with a 12-month price target of $42 a share.
He notes that the company's base operations continue to hold up well despite the difficult consumer environment. In the grocery business, Kraft is clearly taking aggressive steps to achieve substantial margin opportunities.
Two is better than just one in this case, especially when the one is facing competitive challenges and a changing global market landscape. Kraft and Mondelēz will confront those issues.
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