Kraft alters guidance, but I wouldn't worry

Posted Sep 4th 2008 11:45AM by Steven Mallas
Filed under: Earnings Reports, Forecasts, Kraft Foods'A' (KFT)

Food manufacturer Kraft (NYSE: KFT) is backing away from some previous earnings guidance. CEO Irene Rosenfeld said that 2008 net income should be, at the very least, $1.88 per share. This is $0.04 less than the original expectation of $1.92 per share. For 2009, the CEO thinks Kraft will deliver a minimum of $2 per share. Analysts were looking for $2.06 per share.

Should those who own shares of Kraft immediately put an order in to dump the stock? Well, shareholders know what is best for them and their specific situations, but if you want my opinion, I don't think Kraft is a sell.

For starters, that $1.88 per share figure represents an adjustment related to the sale of the Post cereal asset. It therefore doesn't bother me too much. And as for the 2009 estimate, Kraft's $2-per-share guidance includes a $0.03 charge for the Post-cereal exit and monies devoted to cost savings. Analyst estimates for the most part don't factor adjustments into their bottom-line figures. So, this guidance doesn't really frighten me.

What I think is more telling is the issue of margins. Consumer-products companies such as Hershey (NYSE: HSY), Procter & Gamble (NYSE: PG), Kellogg (NYSE: K) and PepsiCo (NYSE: PEP) all have margins on their corporate minds. From what I can tell, Kraft has been pretty successful at protecting itself from inflation by utilizing price increases.

I believe its brand equity will carry it through the storm, and that the dividend yield will keep the stock price from falling too hard. That's going to be important, because I feel we are in for a rough trading environment through the rest of the year.

If we hear, in either future news reports or earnings releases, Kraft's CEO suddenly worrying about the ability to raise prices, and that its cost-cutting measures weren't on track, then I'd take notice. For now, though, I think those holding Kraft will be fine. And if the stock pulls back a little more, it will really become attractive.

Disclosure: I don't own any company mentioned; positions can change at any time.

Tags: consumer products, ConsumerProducts, food, guidance, Hershey, HSY, K, Kellogg, KFT, Kraft, PEP, PepsiCo, PG, procter and gamble, ProcterAndGamble