Kraft Tailwinds Unlikely to Be Sustained

For Rothbort's preview heading into the Kraft conference call, please click here.

As I expected Kraft (KFT - commentary - Cramer's Take) delivered better-than-expected results despite the impact of the strong U.S. dollar. How the company achieved these results can be explained in three ways:

1. Price increases to consumers are starting to show up in the revenue stream.
2. More Americans were eating at home as the economy slipped deeper into recession, causing the company the see strength in its core brands such as Kraft Macaroni & Cheese and Oscar Meyer meats.
3. Emerging market growth was very strong.

Unfortunately, not all of these Kraft tailwinds will be sticking around that long. The company will have a hard time pushing its prices up further, and, as we have seen from the restaurant companies, Americans are beginning to eat out more often as the economy recovers and gas prices remain low. To Kraft's benefit, I think that the emerging markets will continue to expand.

The company reported stronger than expected EPS of 45 cents on net revenue of $9.396 billion. Organic revenue grew 2.3% after including a 1.6% negative impact from the Easter shift and discontinued profit lines. Operating margins increased 290 basis points, to 13.5%. Excluding restructuring charges in 2008 and 2009, margins rose 170 basis points. Higher product pricing to push cost increases last year drove 5.7% of revenue growth in the current year's quarter. Volume and mix changes resulted in 3.5% of revenue declines.

Kraft remains on track to deliver its prior 2009 guidance of $1.88 EPS (which equals consensus) and 3% revenue growth. Volume/mix is expected to turn positive, and margins are expected to expand further. Unprofitable products lines will continue to be phased out.

The U.S. performed well. In Europe, revenue was lower due to foreign exchange rates, whereas margins rose significantly, and volume/mix rose 7.2% as retailers bought product prior to price increases. The developing markets grew rapidly, with market share on the rise and core brand growth of more than 17%.

To my disappointment, Kraft did not provide or discuss its balance sheet or financial condition. I guess we will have to wait until the 10-Q is available from the SEC to perform a detailed financial analysis.

Know What You Own: Other companies that may interest investors include Altria (MO - commentary - Cramer's Take), HJ Heinz (HNZ - commentary - Cramer's Take), Lancaster Colony (LANC - commentary - Cramer's Take), AFC Enterprises (AFCE - commentary - Cramer's Take), Coca-Cola (KO - commentary - Cramer's Take) and PepsiCo (PEP - commentary - Cramer's Take).

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At the time of publication, Rothbort had no positions in the stocks mentioned, although positions can change at any time.

Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele. He also is the founder and manager of the social networking educational Web site TheFinanceProfessor.com.

Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.

Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Term Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.

For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at www.lakeviewasset.com. Scott appreciates your feedback; click here to send him an email.