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Selective Standouts

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Erin Lash, CFA
[email protected]

Even though consumers are maintaining a tight grip on their purse strings, Kraft Foods (KFT) hasn’t backed down from showering the market with new products. For example, new products accounted for 10% of sales in 2011, up from 9% the prior year. Even more encouraging to us, however, is that Kraft isn’t launching new products at any cost, but rather is mindful of profitability (consolidated adjusted operating income jumped nearly 10% in 2011).

We contend that the firm’s dual focus of (1) investing in its brands, and (2) introducing products that resonate with consumers, should ensure that Kraft continues to win at the shelf.

Christopher Growe
Stifel Nicolaus
[email protected]

Kraft Foods (KFT) reported a strong start to the year with EPS up +10% to $0.57, which was $0.02 ahead of our estimate and $0.01 ahead of the consensus estimate. The quarter featured strong organic revenue growth, near double-digit segment operating profit growth, and a heavy investment in marketing and its emerging market infrastructure.

The organic revenue growth was up +6.5% and featured relatively balanced growth around the world — U.S. was soft (+3%), followed by a surprisingly strong performance in Europe (+7.2%), and the usual robust growth in the Developing Markets (+11.5%).

As such, we approach 2012 with real confidence — the company anticipates 5% organic revenue growth (keep in mind that includes a 1% drag on sales from its SKU rationalization in the U.S.) and earnings growth of at least +9%, suggesting EPS of $2.50 or higher. Our model generally conforms to these estimates. We model organic revenue growth of +5% and EPS of nearly +10% to $2.51.

John Ransom
Raymond James & Associates

We reiterate our Outperform rating on shares of CVS Caremark (CVS) and raise our price target to $55 (from $50) on solid 1Q results and continued gains from ongoing channel disruption.

We believe the new customers from the Walgreens/Express Scripts (WAG/ESRX) impasse are likely here to stay, which, combined with the opportunities in [the pharmacy-benefit management sector or] PBM given merger disruption and the benefits from the ongoing generic wave, should set the stage for increased earnings momentum as the year progresses.

Management raised 2012 EPS guidance to $3.23-3.33 to reflect the 1Q beat and the $0.03-0.04 benefit from network impasse in 2Q only. 2H12 guidance still does not include channel disruption benefit — a conservative view given new ExpressScripts customers have now filled several scripts on average.

We are raising 2012 EPS estimate to $3.39 as we now include the Walgreens/Express Scripts benefit for the entire year, though we acknowledge some conservatism on our part in 2H if there is any leakage from a resolution.

Frank G. Morgan, CFA
RBC Capital Markets
[email protected]

CVS reported 1Q12 EPS of $0.65, beating our estimate and consensus on strong top-line results in both retail and PBM segments. Results were driven by continued growth in the PBM segment on recent business wins as well as strong retail same-store sales due to the incremental customer gains from the ESRX/WAG impasse.

Management increased full-year EPS guidance by $0.05, with a potential for an additional $0.06 in 2H12 if WAG does not reach an agreement. A continuation of the dispute beyond 2Q12 would present significant upside for CVS longer term, as customer conversions from WAG may prove to be “sticky.”


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