Christopher R. Growe
Stifel, Nicolaus & Co.
Kraft Foods Group (KRFT) reported what we view as a strong 1Q13 EPS performance with [diluted] EPS of $0.76, coming in a full $0.10 over our estimate and $0.12 above the consensus estimate.
1Q13 revenue growth of 2.1% on an organic basis was in line with our expectations but the company’s very diligent cost control (overhead, productivity, etc.) continues to support robust operating-profit growth and operating-margin expansion. Operating profit was up 9% in the quarter and up 17% on an underlying basis, speaking to the power of these cost-reduction activities.
We look to a strong gross margin improvement as the key to providing the flexibility for the company to continue to spend aggressively on marketing and R&D/new products.
We continue with our Buy rating and $55 target price. This quarter features an improving underlying sales performance that we believe provides some upside potential for earnings across the remainder of the year.
Janney Montgomery Scott LLC
Kraft Foods Group reported 1Q13 [basic] EPS of $0.77 compared to consensus $0.64 and our $0.65 estimate. Net sales increased 2.1% year over year vs. our 0.6% estimate, exceeding our estimate by $0.08 per share, net. Gross profit increased 4% year over year and beat our forecast by $0.05, while EBITDA increased 11% and beat by $0.12. The tax rate was favorable by a net $0.02 per share compared to our forecasts. FY13 guidance was unchanged for… $2.75 in GAAP EPS. We raise our FY13 EPS estimate to $2.77 from $2.76.
Free cash flow visibility is improving. CEO Tony Vernon and team are centered on the most important metrics—volume, cash flow, and ad[vertising] spend—that we believe support an outlook of superior earnings visibility, reinforced by realigned compensation plans. With Q1, management is off to a good start, having delivered strong cash flow ($147 million vs. -$183 million last year), volume, and ad spend (double-digits percent year over year ), which together suggest improving visibility to FY13 free-cash-flow guidance (at least $1 billion).
Erin Lash, CFA
Kraft Foods Groups’ [1Q13]… profitability improvement was impressive (operating margins increased 120 basis points to 17.9%).
We maintain our position that the domestic-grocery operations possess sizable competitive advantages, including a solid brand portfolio (Kraft, Oscar Mayer, and Maxwell House each generate more than $1 billion in annual sales) and substantial economies of scale in North America (with more than $18 billion in annual sales)—which drive our narrow economic moat rating.
Longer term, we expect annual sales growth of 3–4%, even given its exclusive focus on North America…
While we recognize that the shares aren’t a steal at current levels (17 times our fiscal 2014 earnings per share estimate), we still think the stock is somewhat attractive relative to other packaged-food names, which trade in excess of 18-19 times forward earnings, particularly in light of the robust dividend that the company pays, which is yielding around 4% annually.