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Investment Overview for Kraft Foods (NYSE:KRFT)
Below are key drivers of Kraft Foods' value that present opportunities for upside or downside to the current Trefis price estimate for Kraft Foods:
Grocery EBITDA margin
Grocery division EBITDA Margin: In 2010, Kraft's Grocery EBITDA margin stood at 31% and remained relatively stable around the 31% mark in 2011. In 2012 the company's Grocery EBITDA margin improved to 32% primarily driven by higher net pricing. In 2013, Kraft's grocery margins further improved to 32.6% on productivity initiatives and pruning of less profitable products. In 2014, it decreased to the earlier level of around 32%. Going forward, we forecast the metric to remain relatively stable around 32%. Our estimate is primarily based on the improving microeconomic conditions in the US which is expected to drive better volume-mix in the long run, and the company's ongoing productivity and efficiency measures. Volatility in commodity costs being very high is a big uncertainty factor associated with our forecast of the company's EBITDA margins as raising prices to transfer all incremental costs to the consumers is not easy in this highly competitive market environment. If higher commodity costs more than offset the cost savings from the company's ongoing productivity and efficiency programs, and the segment's EBITDA margins fall to around 27% by the end of the Trefis forecast period, it could imply a 8% downside to our price estimate.
Kraft Foods Group is the one of the largest food and beverage companies in the world with annual revenues of more than $18 billion. The company manufactures and markets packaged food products, including beverages, cheeses, convenient meals and various packaged grocery products. It sells its products to consumers primarily in the US and Canada.
Nine of Kraft's many brands earn more than $500 million in revenue each year and contribute close to 70% of the company's total net revenues.
In October 2012, Kraft Foods split into Mondelez International (NASDAQ:MDLZ) and Kraft Foods Group (NASDAQ:KRFT). Mondelez International operates the international snacks business of the parent company with annual revenues to the tune of $32 billion, constituting of popular brands such as Oreo cookies, Trident gum and Cadbury chocolates. Kraft Foods Group manages operations in North America with annual revenues of around $18 billion.
Grocery and Cheese are the two most important divisions for Kraft.
EBITDA margins at the Grocery division highest of all
Kraft's Grocery division primarily produces crackers, salted snacks, biscuits and nuts. The company's popular brands under this division are Planters nuts, Jell-O refrigerated gelatin and pudding snacks crackers and A.1. steak sauce.
In 2010, Kraft's Grocery EBITDA margin stood at 31% and remained relatively stable around the 31% mark in 2011. In 2012 the company's Grocery EBITDA margin improved to 32% primarily driven by higher net pricing. In 2013, Kraft's grocery margins further improved to 32.6% on productivity initiatives and pruning of less profitable products. In 2014, it decreased to around 32%, which was blamed on certain execution missteps. Company-wide adjusted EBITDA margins on the other hand have been around 20% over the last three years.
Cheese market share in the US and Canada
Kraft is the leader in the cheese industry and enjoyed nearly 27% and 28% share of the US and Canada cheese market in 2010 and 2011 respectively. However, lower sales in 2012 resulted in 60bps reduction in market share in 2012. In 2013, the company improved its market share to 27.4% on higher volume. This rose to nearly 28% in 2014.
Kraft's cheese division has two very popular brands - Philadelphia and Velveeta. Each of these generate more than $500 million in sales and are very popular among consumers. With leading brands in the segment Kraft is set to benefit the most from the steady growth in cheese market in the US and Canada.
Innovation and marketing fueling revenue growth
Increased focus on marketing is visible form higher marketing expense as a percentage of revenues at 3.5% in 2012, as compared to 2.9% in 2011, and higher revenues from new products as a percentage of total revenues at around 13% in 2012, as compared to 6.5% in 2009, highlight successful innovative product launches and better product management, in terms of effective marketing. Products lines wherein the innovation was well received by the consumers in 2014 were Oscar Mayer P3, McCafé coffee and Philadelphia soft cream cheese line. In 2014, the advertising expenses decreased as the management felt that the effectiveness of marketing spends had reduced. Hence they cut down on it with a view to save their spending power on a realigned marketing strategy, rather than throw good money after bad.
Productivity and Efficiency Initiatives
Kraft is driving productivity initiatives and is targeting net productivity as a percentage of cost of goods sold (COGS) to be at least 2.5%. It was 1.5% and 2.8% in 2011 and 2012 respectively. The company is also planning to improve its efficiency by reducing its overhead costs as a percentage of net revenues from over 12% to around 8%. The productivity is expected to improve slower going ahead, because Kraft spend less than planned on business restructuring in 2014. While it planned to spend about $150 million in 2014, it ended up spending only $107 million.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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