Some investors smiling about Kraft

September 24, 2006|By Andrew Leckey | Andrew Leckey,Tribune Media Services

What are prospects for my shares of Kraft Foods, especially with the likelihood of Altria Group spinning off its majority interest in the company?

- V.T., via the Internet

Some recent investors in the nation's largest packaged food company are saying "cheese."

Behind their smile is the fact that their shares are up 24 percent this year, after last year's 21 percent decline. The stock, though, isn't much above the June 2001 initial public offering price of $31 per share.

With strong earnings in the second quarter on improved revenue from Eastern Europe and Latin America, Kraft (KFT) increased its dividend.

Kraft is involved in restructuring that includes eliminating thousands of jobs.

It is reshaping itself, completing a $1.07 billion acquisition of United Biscuits' Spanish and Portuguese units, which allows it to reclaim the rights to Nabisco brands in Europe, the Middle East and Africa that it relinquished six years ago. Meanwhile, it sold its Minute Rice business to Spain's Ebro Puleva SA for $280 million.

Most current speculation centers on Altria's anticipated spinoff of its more than 80 percent stake in the food company. Altria shareholders would receive a specified fraction of Kraft stock for each Altria share owned.

A date for such a transaction has not been announced, though the likelihood of it occurring increased when a U.S. District Court recently freed tobacco companies from having to pay a $10 billion judgment.

The spinoff could provide greater operating opportunities for Kraft and remove Altria's tinge of tobacco. On the other hand, because food industry growth has been slow due to rising commodity costs and the popularity of grocery house brands, severing ties with cash-rich tobacco could push Kraft's share price down.

Reflecting this two-edged sword, the consensus rating on Kraft shares from Wall Street analysts is a "hold," according to Thomson Financial, consisting of five "strong buys," 11 "holds" and four "sells."

Irene Rosenfeld, appointed Kraft chief executive in late June, recently announced an overhaul of her management team, designed to build a company that is "bolder, more agile, more creative and more focused," she said.

Kraft earnings are expected to be up nearly 3 percent this year versus a projected 2 percent increase for the major diversified food industry. Next year's forecast of a 5 percent rise compares with 10 percent predicted industrywide. The five-year annualized return is expected to be 7 percent versus 8 percent projected for its peers.

Andrew Leckey writes for Tribune Media Services.

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