Kraft Foods reported its first quarter EPS of $0.52, which was $0.04 above our estimate and $0.06 above the consensus estimate. This quarter was led by a strong revenue-growth performance in the quarter — sales were up 4.6 percent (mostly pricing) and would have been up over 6 percent including the benefit from Easter. This sort of revenue growth could continue to produce upside to our EPS estimates.
We believe this pricing will continue to pick up especially in Q2 2011. By the end of the quarter, we expect most of the pricing Kraft needs for the year to be in place, but clearly this remains a “watch out” especially for Europe where cost inflation is high (chocolate, coffee, and biscuits especially) and the retail environment remains challenging.
Kraft reported Q1 adjusted earnings of $0.52, a nickel ahead of the consensus estimate and our own. Kraft delivered organic growth of 4.6 percent, modestly behind our projection, but its overall revenue growth of 11 percent was well ahead of our 6.4 percent expectation. Guidance of at least 4 percent organic growth and EPS of at least $2.20, now excluding the lost Starbucks business, hewed closely to Street expectations.
Revenue growth was solid across all three segments. In North America, organic growth of 2.2 percent was a bit below our estimate, but price realization of 3.3 percent was solid and representative of Kraft’s ability in the quarter to get better pricing to cover input push than we expected. Similarly, revenue growth of 24 percent in the developing markets and 11.3 percent in Europe exceeded our expectations. It also appears that revenue synergies may be occurring more quickly than we projected.
Meredith Adler, CFA
CVS Caremark is demonstrating good stability, with Q1 2011 EPS a tad above guidance and Street expectations. In the retail business, the company remains disciplined about avoiding front-end promotions that do not improve profits as well as sales. Free cash flow was strong this quarter, as inventory dropped as hoped and pharmacy benefit management (or PBM) cash flow accelerated. It seems likely that CVS will hit its annual target of $4.0 billion-$4.2 billion and use that cash to purchase Universal American, buy back stock, raise the annual dividend by 43 percent, and invest in its core businesses.
CVS reported Q1 cash EPS of $0.57, compared to both Barclays Capital and consensus of $0.55. Revenues were slightly higher than our forecast at $25.9 billion as was the operating margin.
We are maintaining our Q2 EPS of $0.65 versus guidance of $0.63-$0.65, but are raising our FY 2011 EPS to $2.76 from $2.69 and our FY 2012 EPS to $3.11 from $3.03. Our model now includes the Universal American Part D business, which we had not included previously given the involvement of Barclays Capital in the transaction.
Lisa C. Gill
After reporting a $0.02 beat relative to consensus (Q1 2011 adjusted $0.57 versus Bloomberg $0.55 and J.P. Morgan estimate of $0.54) CVS held a (May 5) conference call to discuss earnings. On the call, CVS denied plans for a breakup of the company, gave a positive update on the early part of the selling season and affirmed that the Aetna integration was on track.
Early update on selling season is positive. While it is not typical for PBMs to discuss specific win/losses this early in the selling season, Per Lofberg, the head of CVS Caremark, did give some encouraging commentary on the company’s performance so far. Lofberg noted that the company was seeing good traction with its Rx (Prescription) Advisor and Maintenance Choice programs. In addition, he noted that the company was in final stages of negotiations on several significant renewals and new customers, which we view positively.