Kraft's Results Lead to Split Views

After Kraft reports second-quarter earnings that rise 13%, with some bumps along the way, analysts debate whether to buy, sell or hold the stock.
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(Kraft story updated with Deutsche Bank commentary on company's second-quarter earnings)
NEW YORK (TheStreet) -- Shares of Kraft (KFT) were rising 2% on a down session for equities markets **last** Friday after the company reported second-quarter earnings that rose by more than 13% from the previous year, beating Wall Street estimates.

On Monday, the stock was inching 0.1% lower to $30.33.

Kraft confirmed full-year operating earnings guidance of at least $2 a share and trumpeted its controversial acquistion of Cadbury earlier this year. Kraft said its second-quarter numbers reflected "stronger-than-expected year-to-date profit performance and greater-than-anticipated synergies from the integration of Cadbury, offset by investments in brand-building activities and additional actions that will drive top-tier growth."

But the company also lowered its organic revenue-growth forecast for 2010 to a range of 3% to 4% from prior guidance of at least 4%. Kraft blamed the tempered outlook on larger-than-expected inventories at its Cadbury distributors as well as the aggressive price cuts its been forced to make in order to keep up with competitors, as the industry tries to entice consumers still hurt by the recession back to supermarket shelves.

Kraft increased its estimate of cost synergies expected from the integration of Cadbury to at least $750 million from $675 million, as well as adjusted total costs of the integration program to about $1.5 billion, up from $1.3 billion.

Kraft Stock Rating Report (KFT) Rating and Financial Analysis

For the second quarter, Kraft posted earnings of $937 million, or 53 cents a share, up 13.3% from $827 million, or 56 cents a share, the previous year. Excluding one-time items, Kraft posted earnings of 60 cents a share vs. the consensus estimate of 52 cents a share.

Net revenue during the quarter increased 25.3% to $12.3 billion, thanks mostly to the Cadbury acquisition, though the number fell just shy of the Wall Street estimate of $12.33 billion.

In a research report, analysts at Credit Suisse applauded Kraft stock for its "big" second-quarter earnings beat.

"As expected, the weak environment in the U.S. dampened sales results and led to a reduction in sales guidance to 3% to 4%," analysts Robert Moskow and William Sawyer wrote in the note. "But the bad news there was offset by excellent performance in Western Europe and developing markets."

The Credit Suisse analysts believe that Kraft can outpace its U.S. competitors with 5% sales growth in the back half of the year with some help from retail partner

Walmart

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.

The analysts also said Kraft will have more flexibility to reinvest in growth in the second half. They believe the company can defend its market share from aggressive competition in the natural cheese, salad dressing and snacks categories. Because the company has reduced overhead costs and carried out brand mix shifts in the first half of the year, Kraft has a cushion as it works through excess inventory at Cadbury, the analysts added.

Meanwhile, analysts at Barclays Capital came out of Kraft's second-quarter conference call believing that Kraft will continue to be able to deliver earnings of at least $2 a share this year and 15% growth off of this base in 2011. "This is critical because that's the number upon which investors are basing valuation for Kraft and Cadbury combined," analysts Andrew Lazar and Jane Gelfand wrote in an investor note.

Kraft remains their top pick in the large-cap packaged-foods space.

But unlike their peers, Goldman Sachs analysts Judy Hong and Tyler Walling were ambivalent after the Kraft call. On the positive side, they wrote in a note, Kraft has shown improvement on its margins in Europe -- a market that had lagged in profit for some time.

"On the negative side, base business trends remain relatively weak with North America top-line sluggish and share losses apparent," Hong and Walling noted. "Management intentions to ramp up promos could limit margin upside and further exacerbate an already competitive backdrop in several of its categories." They also warned that Cadbury will likely face sales headwinds from inventory reductions and economic weakness in parts of Europe and Asia during the second half of the year.

Hong and Walling have a neutral view of Kraft's stock, noting that cost synergies will help earnings per share, but higher promotional and ad spending in the U.S. during the second half will limit upside for the stock.

But the Kraft bulls appeared to win the day. David Palmer and Jeffrey Birnbaum of UBS said in their Kraft earnings re-hash that the company beat profit expectations despite slower-than-expected Cadbury growth in the U.S. and developing markets and the weaker-than-expected cheese and snacks businesses.

According to the analysts, who rate Kraft a buy, the better-than-expected results are a "validation of what is working." They cited the company's reinvestment in marketing and innovation and the broadening of its global portfolio of products. The UBS pair said these investments should help lead to per-share earnings growth in the mid-teens in 2011. That's in-line with the Wall Street consensus. As of now, analysts are expecting Kraft to post year-over-year EPS growth in 2011 of about 14%.

Deutsche Bank analysts Eric Katzman and Rohini Nair said in an equity research note that when it comes to Kraft, they're staying on the sidelines for now.

Katzman and Nair explained that while they recognize the long-term potential for the company's portfolio improvement through Cadbury in candies, snacks and the emerging markets, they're still concerned about the tough U.S. promotional market and mixed signals from the snack and gum markets.

"Unfortunately for investors in the sector, fundamentals remain challenged and Kraft's 2Q10 results served to reinforce the market's concerns," the analysts wrote. "CEO Rosenfeld, while highlighting various achievements, nevertheless admitted the core Kraft business in North America was weak."

-- Reported by Andrea Tse in New York

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