Cadbury Acquisition Sweetens Kraft - Analyst Blog

Kraft Foods Inc. (KFT) delivered second quarter results with earnings (excluding one-time items) of 60 cents per share, exceeding the Zacks Consensus Estimate of 52 cents by 15.4% and year-ago earnings of 53 cents by 13.2%.

However, on a reported basis, earnings for the quarter plunged 5.4% to 53 cents per share compared with 56 cents per share in the year-ago quarter.

Revenue and Operating Income

Quarterly net revenue spiked 25.3% to $12.3 billion, boosted 22.8% by the Cadbury acquisition, and 0.8% from favorable currency translation, offset 0.3% by divestitures. However, combined organic net revenues grew 2.2%, driven by 2% and 3.3% organic net revenue growth at Kraft Foods’ base business and Cadbury, respectively.

Operating income advanced 16.8% to $1,701 million in the quarter, including a 17.8% benefit from Cadbury’s operations, partially offset by a negative 11% impact from integration and acquisition costs and 0.6% due to unfavorable currency. Excluding these factors, operating income at Kraft Foods’ base business grew 10.6%, portraying volume/mix gains, efficiency improvements, partially offset by ramp up in raw material costs and promotional expenses.

Segment Details

In the North American segment, quarterly net revenues jumped 6.3% to $6,161 million, powered by a 6.9% impact from the Cadbury acquisition and 1.6% from favorable currency translation. However, combined organic net revenues declined 1.3% in the quarter.

European net revenues rose 34.1% to $2,793 million in the quarter, reflecting a 31.8% benefit from the Cadbury acquisition and a negative 2.6% impact from currency translation. Combined organic net revenues grew 3.9%.

Developing Markets net revenues shot up 73.4% to $3,299 million in the quarter, portraying a 61.4% impact from the Cadbury acquisition and a favorable 1.9% effect from currency translation. However, combined organic net revenues grew 8.1%.

Other Financial Updates

Kraft exited the quarter with cash and cash equivalent of $2,854 million, long-term debt of $29,103 million and inventory of $5,167 million.

Guidance

Kraft revised its fiscal 2010 combined organic net revenues growth target to 3%–4% annually, reflecting the regularizing of Cadbury’s trade inventory practices and aggressive advertising expenditure. Earlier, the company expected at least 4% of combined organic net revenue growth in fiscal 2010.

The company remains optimistic about the Cadbury integration and projects total cost synergies to be at least $750 million, up from the prior estimate of at least $675 million. To achieve the total cost synergy target, Kraft has increased its integration expenses to about $1.5 billion from $1.3 billion earlier.

Kraft has re-affirmed fiscal 2010 earnings guidance (excluding one-time items) of at least $2.00 per share, reflecting solid first half fiscal 2010 results and increased total cost synergies from the integration of Cadbury, offset by incremental investments behind brand and sales enhancement programs.
 
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