Financial Analysis: Kraft Foods Inc. (KFT)
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Financial Analysis: Kraft Foods Inc. (KFT)

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Course 5190 - Financial Management Presentation

Course 5190 - Financial Management Presentation

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  • Yaw
  • Yaw
  • Yaw Incorporated in 2000 in the Commonwealth of Virginia, Kraft Foods is the largest food company in the US and second largest food company in the world. Kraft foods has approximately 127,000 employees worldwide, and manufactures and markets packaged food products. Kraft foods sells its products to consumers in 170 countries, and has operations in more than 75 countries. They are a member of the Dow Jones Industrial Average, Standard & Poor’s 500, the Dow Jones Sustainability Index, and the NYSE.
  • Yaw The company is organized into 3 Segments operating as Kraft Foods in North America, Europe and Developing Markets; and 6 Consumer Sectors that include: Beverages, Cheese, Convenient Meals, Grocery, Snacks, Biscuits, Coffee, Chocolate and Confectionery.
  • Yaw Kraft supports Class A Stock. Because Kraft Foods Inc. is essentially a holding company, its principal source of revenues comes from its segments. These Segments are wholly owned subsidiaries that are not limited by long-term debt in their ability to pay dividends. In 2010, Kraft reported $49.2 billion in Revenues and Earnings from its operations; and $3.6 billion in Earnings Before Income Taxes. At December 31, 2010, Kraft reported Net Assets of $35.9 billion and Gross Assets of $95.3 billion.
  • Yaw Financial data reported in Kraft‘s 2010 and 2011 annual reports was reviewed, and the following Key Ratios have been calculated.
  • Yaw We were interested in understanding Kraft’s Short-term (operating) activity ratios. We found that Days In Inventory improved from 2009 to 2010. - This was directly related to a program instituted to incentivize Kraft managers to clear their inventories. Receivables Turnover demonstrated that Kraft is very efficient in collecting money from its customers. ---------- Payables turnover is an activity ratio calculated as revenue divided by payables. • Kraft Foods Inc.'s payables turnover declined from 2008 to 2009 and from 2009 to 2010. Working capital turnover is an activity ratio calculated as revenue divided by working capital. • Kraft Foods Inc.'s working capital turnover deteriorated from 2008 to 2009 and from 2009 to 2010. Operating cycle is equal to average inventory processing period plus average receivables collection period. • Kraft Foods Inc.'s operating cycle deteriorated from 2008 to 2009 and from 2009 to 2010. Cash Conversion cycle is a financial metric that measures the length of time required for a company to convert cash invested in its operations to cash received as a result of its operations; equal to average inventory processing period plus average receivables collection period minus average payables payment period. • Kraft Foods Inc.'s cash conversion cycle deteriorated from 2008 to 2009 and from 2009 to 2010.
  • Yaw We were also interested in understanding Kraft’s Long-term (investment) activity ratios. Fixed Asset Turnover and Equity Turnover are activity ratios that have both remained steady since 2009. This recent stability is notable because of the significant investment sunk into Kraft's 2010 Cadbury acquisition. ------ Asset turnover is an activity ratio calculated as total revenue divided by total assets. • Asset turnover measures a firm's efficiency at using its assets in generating sales or revenue - the higher the number the better. • It also indicates pricing strategy: companies with low profit margins tend to have high asset turnover, while those with high profit margins have low asset turnover. Kraft Foods Inc.'s total asset turnover deteriorated from 2008 to 2009 and from 2009 to 2010.
  • Yaw Current ratio is a liquidity ratio that indicates Kraft should be able to to pay back its short-term liabilities by using its short-term assets like cash, inventory, and receivables. • Kraft has had a moderate current ratio for the past 3 years. Kraft's Debt-to-Capital ratio improved from 2008 to 2009, and remains steady. P/E Ratio has also been consistent for the past few years. ------ Quick ratio is a liquidity ratio calculated as (cash plus short-term marketable investments plus receivables) divided by current liabilities. • Quick ratio is more conservative than the current ratio and excludes inventory from current assets.  • Inventory is excluded because some companies have difficulty turning their inventory into cash. • In the event that short-term obligations need to be paid off immediately, there are situations in which the current ratio would overestimate a company's short-term financial strength. • Kraft's quick ratio improved from 2008 to 2009 but then slightly deteriorated from 2009 to 2010 not reaching 2008 level.
  • Yaw Over the past 5 years, Kraft has demonstrated little difficulty maintaining its Gross Profit Margin . This is a good indicator of the company’s profitability. In 2010, Kraft kept pace with the S&P 500 and outperformed its industry.
  • Yaw • Kraft faces intense competition in all aspects of its business. • In 2010, Kraft revised its peer performance group to only include food and beverage companies. • We compared Kraft’s RETURN ON EQUITY performance to Bunge Limited and Unilever from the Food Products industry, PespsiCo from the Beverage industry and Hershey’s from the Confectionary industry . • In terms of ROE, Kraft outperformed all competitors, except Hershey. ---------- Hershey’s ROE is several times that of all it’s competitors. In fact, it ranks 12th in the top 25 list of all company ROEs. HSY is a performance outlier, in that it is ranked in the 96 th percentile of all companies in ROE and 94 th for companies in the Consumer Goods Sector .
  • Yaw Kraft’s 5-year Sales performance outperformed its industry and kept pace with the S&P 500. The company also outperformed the S&P 500, in terms of Dividend Growth , and has shown consistent Dividend Growth over time.
  • Len
  • Len List 5 year CAGR and projected growth rates for COGS, Assets, Sales, debt, equity, net earnings etc. The external financing needed is a standard calculation based on all income statement and balance sheet numbers
  • Geneva
  • Geneva Kraft is financed through debt and equity. As you can see from the chart before you, the debt to capital relationship and the equity to capital relationship has been constant over the past few years. In 2010, Kraft was involved in two key transactions: Kraft sold its Pizza Product line for $3.6 billion, which provided in part the cash to purchase Cadbury Company. Kraft acquired British Cadbury for $18.5 billion, while assuming $2.4 billion of Cadbury’s debt in 2010.
  • Geneva We monitored the company’s funding needs and patterns, by preparing a statement of sources and uses of funds. Sources of funds are reflected here come from increases in liabilities. This shows that liabilities have increased from 2009 to 2010. Kraft borrowed more money and taken on more debt. Increase in cash, receivables, inventories, etc. are Uses of funds.
  • Ayesha
  • Ayesha Kraft’s is Structured financially through Debt which is 44.5% and Equity which is 55.5% . The company’s financing and capital structure is designed to leverage its debt-equity ratios. The debt to capital ratio is .44 which indicates that Kraft Foods is not a highly levered firm. As Geneva mentioned earlier, their cost structure has remained the same since 2007.  
  • Ayesha Let’s take a look at Kraft’s beta which is a measure of its relative risk. Kraft’s low beta of .55 says that it is a relatively mature and stable company. It has a low risk / risk neutral Capital Structure. The demand for Kraft’s products are somewhat less sensitive to economic conditions. It remained between .55 and .63 for the past 5 years Here is a comparison to industry peers – Most support a low β .
  • Ayesha The low β drives down the cost of equity. Relationship to risk and expected return is a positive rate of return that is below market. We computed expected return based on capital asset pricing model (CAPM) to be 7.26%. This is in-line with the low risk beta.
  • Ayesha Kraft has issued multiple periodic bonds. As the older debt is retired, principle is returned to the debt holder. Then Kraft Foods initiates the creation of additional new public debt to finance its major activities. Its bonds have a good credit rating of Baa2 as rated by Moody’s. The average cost of debt is 5.9%. On February 8, 2010, the company issued $9.5 billion in senior unsecured notes and primarily used the net proceeds ($9.4 billion) to finance the Cadbury acquisition.
  • Ayesha Kraft Foods’ weighted average cost of capital (WACC) is at relatively low at 6.15%. There are a number of factors that affect Kraft Food’s cost of capital. The firm is not very highly levered, with the debt being 44% of the total capital. The firm’s credit rating is good carrying Baa2 Moody’s rating, which allows Kraft Foods to borrow at a relatively inexpensive rate – 5.9% at the moment. The corporate tax of 31.5% further reduces the cost of capital financed through debt via the tax shield. Kraft’s β is very low at only 0.55. At such low risk-level, the cost of capital financed with equity is also a fairly low. All above factors combined allow Kraft Foods to access capital at the low rate of 6.15%, which is slightly above the risk-free rate of 30-year treasuries.
  • Geneva In June 2001, Kraft completed the second largest IPO buy out in USA history until that time. Kraft’s Prospectus from that time stated that the company would pay quarterly cash dividends. Kraft’s initial quarterly dividend payout was $.13 in December 2001.
  • Geneva Kraft’s Dividend payouts’ have increased since the IPO, and have remained steady since 2008. Total Dividends paid out in 2010 were $2 billion with a payout ratio of 49%. Kraft’s is projected to pay out these dividends consistently in 2011.
  • Ayesha
  • Ayesha Kraft’s stock has beaten the S&P 500 and Dow Jones Industrial Average. The Stock declined by 20% during last quarter of 2008 and early 2009, during the peak of the economic downturn. It recovered after this earlier short decline.
  • Ayesha Kraft’s quarterly dividend of 29 cents has been consistent during the past couple of years. Based on a growth rate of 5.8% and a discount rate of 7.26%, we calculated the value of stock to be $83.95. This is way more than their market value of $31.16. This is primarily due to a combination of high dividend growth rate and low cost of capital. Using the total corporate value model, calculations indicate Kraft’s fair value price to be $36.99; but it currently trades at a stock price of $31.16. At this price, the company is trading at an approximate 15.76% discount to its fair value.
  • Len
  • Len
  • Len
  • Yaw This group of analysts reviewed a number of financial metrics in its analysis. We considered recommendations of professional analysts assigned to KFT, who have suggested Kraft as a moderate buy. Finally, we conducted a qualitative SWOT analysis. SWOT
  • Yaw What recommendation does the audience think should be made?? Our consensus recommendation is to BUY Kraft.
  • Quote from a MarketWatch article. Any questions? Thank you!

Financial Analysis: Kraft Foods Inc. (KFT) Financial Analysis: Kraft Foods Inc. (KFT) Presentation Transcript

  • Kraft Foods Inc. (KFT) Financial Analysis Leonard Loster Yaw Ofosu Ayesha Tanveer Geneva Todd Financial Management - 5190 March 30, 2011
    • Background / History
    • Key Ratios
    • Projections
    • Financing
    • Capital Structure and Costs
    • Dividend Policy
    • Stock Value
    • Street Opinion
    • Recommendation
    Agenda
    • Background / History
    • Key Ratios
    • Projections
    • Financing
    • Capital Structure and Costs
    • Dividend Policy
    • Stock Value
    • Street Opinion
    • Recommendation
    Agenda
  • Fast Company Facts Source: http://kraftfoodscompany.com
    • Largest food company in U.S. & World’s 2 nd largest
    • Headquartered in Northfield, Illinois
    • Sector: Consumer goods
    • Industry: Food Products
    • NYSE Listed – KFT
    • Part of S&P 500, Dow Jones Composite, Dow Industrials
    • 127,000 employees worldwide
    • Operations in more than 75 countries worldwide
    • Sales in approximately 170 countries
    • 180 manufacturing and processing facilities
  • Products & Operations Consumer Sectors (Net Revenues) Segments (Operating Income) Source: 2011 10-K Filing
  • Financial Statement Analysis
    • Class A Common Stock, no par value.
    • Stock Price: $31.16*
    • Total shares outstanding: 1.75B
    • Market Cap: $54.7B
    • EPS: $2.37
    Source: http://www.finra.org/ as of 3/24/2011 Income Statement Balance Sheet Cash Flow Statement
    • Revenue: $49.21B
    • Gross Profit: $17.9B
    • EBIT: $3.6 B
    • Net Earnings: $4.1B
    • Dividends Paid: $2B
    • Retained Earnings: $2.1B
    • Total Assets: $95.2B
    • Total Liabilities: $59.3B
    • Total Equity: $35.9B
    • Total Debt: $28.7B
    • Operating Activities: $3.75B
    • Investing Activities: ($7.46B)
    • Financing Activities: $4.18B
  • Agenda
    • Introduction/Background/History
    • Key Ratios
    • Projections
    • Financing
    • Capital Structure and Costs
    • Dividend Policy
    • Stock Value
    • Street Opinion
    • Recommendation
  • Short-term (operating) Activity Sources: 1. Morningstar 2. http://finapps.forbes.com/finapps/jsp/finance/compinfo/Ratios.jsp?tkr=kft Turnover 2010 2009 2008 2007 2006 Days In Inventory 52.96 53.11 50.67 56.28 56.97 Receivables Turnover 7.53 7.77 8.97 7.17 8.88 Payables Turnover 9.10 10.72 12.51 9.16 13.20 Working Capital Turnover 7.64 7.76 8.34 7.12 7.20 Average No. of Days 2010 2009 2008 2007 2006 Operating Cycle 88 81 73 91 78 Cash Conversion Cycle 48 47 44 51 51
  • Long-term (investment) Activity Sources: 1. 2011 10-K Filing 2. http://www.stock-analysis-on.net/NYSE/Company/Kraft-Foods-Inc/Ratios Efficiency 2010 2009 2008 2007 2006 Fixed Asset Turnover 3.57 3.78 4.26 3.46 3.54 Total Asset Turnover 0.52 0.61 0.67 0.55 0.62 Equity Turnover 1.37 1.56 1.90 1.36 1.20
  • Sources: 1. 2011 10-K Filing 2. http://www.stock-analysis-on.net/NYSE/Company/Kraft-Foods-Inc/Ratios Liquidity, Debt and Valuation Liquidity 2010 2009 2008 2007 2006 Current Ratio 1.04 1.08 1.03 0.63 0.79 Quick Ratio 0.58 0.64 0.54 0.34 0.39 Debt 2010 2009 2008 2007 2006 Debt-to-Equity 0.80 0.73 0.91 0.77 0.36 Debt-to-Capital 0.44 0.42 0.48 0.43 0.26 Valuation 2010 2009 2008 2007 2006 P/E Ratio 13 13 14 19 19
  • Profitability Sources: 1. Morningstar 2. 2011 10-K Filing Return on Sales (%) Industry (2010) S&P 500 (2010) 2010 2009 2008 2007 2006 Gross Margin 16.0 38.3 36.38 36.15 33.21 33.81 36.14 Net Margin 8.3 12.0 8.36 7.48 6.87 6.95 8.91 Return on Investment (%) Industry (2010) S&P 500 (2010) 2010 2009 2008 2007 2006 Return on Equity (ROE) 24.1 22.3 11.52 11.66 12.94 9.93 10.73 Return on Assets (ROA) 8.8 7.9 4.34 4.54 4.58 3.99 5.52
  • Return on Equity Comparison (2010 Competitors) Source: http://investing.businessweek.com/research/stocks/financials/ratios.asp?ticker=KFT:US
  • 5-Year Annual Averages Sources: 1. http://finapps.forbes.com/finapps/jsp/finance/compinfo/Ratios.jsp?tkr=kft 2. http://moneycentral.msn.com/investor/invsub/results/compare.asp?Symbol=KFT Valuation Kraft Industry S&P 500
      • P/E Ratio 5-Year High
    15.6 3.9 17.8
      • P/E Ratio 5-Year Low
    15.6 0.8 2.8 Profitability Kraft Industry S&P 500
      • Gross Profit Margin
    35.1 40.3 37.9
      • Net Profit Margin
    7.7 8.4 10.9 Return Investment (%) Kraft Industry S&P 500
      • Return on Equity
    11.4 25.5 19.1
      • Return on Assets
    4.6 8.3 7.5
      • Return on Capital
    4.6 12.5 10.0 Growth Rates % Kraft Industry S&P 500
      • Sales
    7.60 4.97 7.71
      • Dividends
    5.80% 8.33% 4.79%
  • Agenda
    • Introduction/Background/History
    • Key Ratios
    • Projections
    • Financing
    • Capital Structure and Costs
    • Dividend Policy
    • Stock Value
    • Street Opinion
    • Recommendation
  • Projections Sources: 1. Forbes.com 2. http://www.marketwatch.com/investing/stock/KFT External Funds Needed $4.53B Sustainable Growth Rate 5.99% Internal Growth Rate 21.12% COGS $33.6B Assets $102.5B Liabilities $63.8B Net Earnings $4.4B Equity $36.6B Growth 7.6%
  • Agenda
    • Introduction/Background/History
    • Key Ratios
    • Projections
    • Financing
    • Capital Structure and Costs
    • Dividend Policy
    • Stock Value
    • Street Opinion
    • Recommendation
  • Financing
  • Sources and Uses for year ending December 31
  • Agenda
    • Introduction/Background/History
    • Key Ratios
    • Projections
    • Financing
    • Capital Structure and Costs
    • Dividend Policy
    • Stock Value
    • Street Opinion
    • Recommendation
  • Source: 2011 10-K Filing Capital Structure
      • Structured financially through Debt and Equity
      • Debt-to-Equity: 0.80
      • Debt-to-Capital: 0.44
      • Not highly levered
    44.5% 55.5%
  • Volatility (Beta)
    • A low risk / risk neutral Capital Structure
      • Relatively low β = 0.55
    • Between 0.55 and 0.63 for past 5 years
    • Comparison to industry Peers – Most support a low β
    • Industry performance is less volatile than market
    Sources: 1. 2011 10-K Filing 2. http://www.federalreserve.gov/releases/h15/update/ 3. http://finance.yahoo.com/q/ks?s=kft
  • Cost of Equity CAPM 7.26% = 4.44% + 0.55 (9.56% - 4.44%)
    • Risk free rate based on 30-year Treasury rate
    • Expected market return is CAGR for time period 1900–2010
    Source: Risk free rate is taken from Federal Reserve treasury rates as of 3/24/2011 Expected market return is taken from Moneychimp.com
  • Cost of Debt
    • Multiple periodic bond issues
    • Good credit rating: Baa2 (Moody’s)
    • As debt is retired, Kraft issues new debt
    • Average Cost of Debt R d = 5.91%
    Sources: 1. 2011 10-K Filing 2. http://www.federalreserve.gov/releases/h15/update/
  • Cost of Capital
    • Relatively low β (0.55) -> R e = 7.26 %
    • High credit rating -> low R d = 5.91% before tax shield
    • Corporate tax rate 31.5% -> Further reduces WACC
    • Total Debt = $28.7B, Market Value of Equity = $54.7B
    WACC = 6.15%
  • Agenda
    • Introduction/Background/History
    • Key Ratios
    • Projections
    • Financing
    • Capital Structure and Costs
    • Dividend Policy
    • Stock Value
    • Street Opinion
    • Recommendation
  • Dividend Policy
    • Initial Public Offering (IPO): June 13, 2001
    • Prospectus provides Dividend Payout Policy
      • Dividends to be paid quarterly
    • Dividend Reinvestment Program managed by Wells Fargo
    • Fiscal year: January 1 – December 31
    Source: https://us.etrade.com/e/t/home/beta-a?PageName=3X-horiz?PageName=hp_beta
  • Source: http://www.dividend.com/ Dividend History
  • Agenda
  • Price History Source: http://moneycentral.msn.com/investor/charts/chartdl.aspx?symbol=US:KFT KFT Current Market Price: $31.16
  • Stock Value
    • Constant dividend = $1.16
    • Discount Rate = 7.26%
    • Retention Ratio = 51%
    • ROE = 11.52%
    • Dividend Growth Rate = 5.87%
    • Market Value of a Stock = $31.16
    • Value of a Stock (DDM) = Dividend per Share = $83.95
    • Discount Rate – Dividend Growth Rate
    • Value of a Stock = Debt + Equity = $36.99
    • (Total Corporate Value Model) # of shares outstanding
  • Agenda
    • Introduction/Background/History
    • Key Ratios
    • Projections
    • Financing
    • Capital Structure and Costs
    • Dividend Policy
    • Stock Value
    • Street Opinion
    • Recommendation
  • Street Opinion
    • Analysts’ Thoughts
      • Asian Market Potential
      • Cadbury Acquisition
    • Current Market Value: $31.16/Share
    • Calculated Stock Value based on DDM: $83.95/Share
    • Calculated Stock Value based on TCVM: $36.99/Share
  • Agenda
    • Introduction/Background/History
    • Key Ratios
    • Projections
    • Financing
    • Capital Structure and Costs
    • Dividend Policy
    • Stock Value
    • Street Opinion
    • Recommendation
    • Strengths
    • Excellent Reputation and Image
    • Marketing Expenditure Paying Off
    • New Focus on Innovation and Success
    • Sucessful Core Brands
    • Strong organic top-line growth
    • Opportunities
    • Cadbury acquisition - New markets
    • Leverage value proposition to compete against other brands
    • Correctly predict and interpret changes in consumer preferences and demand
    • Threats
    • Increased or unanticipated costs of Cadbury integration
    • Increase in Commodity Costs
    • Changes in relationships with significant customers or suppliers
    • Currency Risk
    • Weaknesses
    • Average Operating Results
    • Subject to risks associated with operating in a global marketplace
    • Pressure on European Sales
    • Highly competitive industry
    SWOT ANALYSIS: Kraft Foods Inc. (KFT)
  • A A A A A A A A A A A A A A A A A BUY
  • We remain confident that we will deliver earnings growth in 2011 that’s both ahead of our long-term targets and within the top tier of our peer group. ~ Irene Rosenfeld, Chairman and CEO Source: http://www.marketwatch.com Questions?