Kraft Still Comforts, Satisfies

NEW YORK (TheStreet) -- Slowing growth may be the expectation for mature companies, especially those with a footprint worldwide. But whenever that growth comes to crawl, frustrated investors apply a sort of "psychological defense," often reminding themselves that "slow-and-steady" wins the race. That has not been the case with Kraft Foods (KRFT), which has maintained a strong reputation for execution.

It's not that the company has operated flawlessly this year. Since Kraft split off its snack food business from Mondelez (MDLZ) (worth some $35 billion), the remaining portions have struggled with both organic growth and margins.

Given Kraft's history, that the company has not enjoyed the benefit of the doubt of a ConAgra Foods (CAG), which is not as efficiently operated, is a little surprising given that Kraft outperforms ConAgra in both operating margin and gross margin. With the stock still trading below its fair-market value of $60, smart investors would do well to nibble on Kraft here at $53 a share.

As with General Mills (GIS) and, to a lesser extent, Nestle (NSRGY), Kraft's lack of organic growth has frequently been cited in bearish arguments. It's true organic growth, which measures a company's operational performance using only internal resources and excluding acquisitions, has been a relative disappointment.

[Read: Kellogg's Stuck in a Box]

I also believe the Street has exaggerated Kraft's 4% decline in organic revenue in the third quarter. On a year-over-year comparison, revenue was indeed horrific. But the recent struggles, which were sufficiently explained by the company's management, underscored the adverse impact that the Mondelez spinoff had on the third quarter.

Here's another example of how the Street sometimes conveniently ignores whatever it wants. ConAgra, which completed its deal for Ralcorp earlier this year, enjoys a higher valuation multiple, but has yet to fully synergize the deal and lacks Kraft's operational efficiency.

This is not to pick on ConAgra, which, in its own right, has overcome the sort of declining volumes and weak margins that have plagued the entire sector. When performance expectations are being set and, in this case, perceived as "unmet," it helps that investors have context.

More impressively, Kraft's disciplined approach has led to a 15% year-over-year increase in operating income. In many respects, this part of the operation has been overlooked given that the company has been consistently profitable. But it's no easy task to deliver mid double-digit profit growth in the face of weak prices and rising commodity costs. Not to mention the year-over-year volume declines the industry has suffered.

[Read: Food Industry Faces Labeling Changes]

Essentially, ever since the Mondelez deal, the deck has been consistently stacked against Kraft's management. That the brand was able to grow at all in the recent quarter amid a strict restructuring/cost-cutting program, should be celebrated, especially since this restricted the company's marketing effort.

I agree with Kraft's conservative stance facing its 2014 guidance. The question, though, is to what extent management can sustain this "simmering performance" without infusing cash into marketing/advertising budget?

With all of the companies being in the "same pantry" with respect to the challenging-but-improving packaged food environment, under-investing in areas like advertising/marketing can be the difference in market share gains or losses to rivals like Kellogg (K), Nestle and General Mills. It remains to be seen which one will be the first to sacrifice near-term profits for market share.

I realize I've been somewhat of a Kraft apologist. Truth be told, I was raised on Kraft's Macaroni & Cheese and remember all of the smiles it has put on my face. But that doesn't take away from the fact that this has always been and still remains a well-run company. It's a travesty that Kraft doesn't get the respect it rightfully deserves.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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