Financial Analysis: Kraft Foods Inc. (KFT)

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Kraft Foods Inc. Kraft Foods Inc. (KFT) (KFT) Financial Analysis Financial Analysis Leonard Loster Leonard Loster Yaw Ofosu Yaw Ofosu Ayesha Tanveer Ayesha Tanveer Geneva Todd Geneva Todd Financial Management - 5190 Financial Management - 5190 March 30, 2011 March 30, 2011

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

Page 1: Financial Analysis: Kraft Foods Inc. (KFT)

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

Leonard LosterLeonard LosterYaw OfosuYaw Ofosu

Ayesha TanveerAyesha TanveerGeneva ToddGeneva Todd

Financial Management - 5190 Financial Management - 5190 March 30, 2011March 30, 2011

Page 2: Financial Analysis: Kraft Foods Inc. (KFT)

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Background / HistoryBackground / HistoryKey RatiosKey RatiosProjectionsProjectionsFinancingFinancingCapital Structure and CostsCapital Structure and CostsDividend PolicyDividend PolicyStock ValueStock ValueStreet OpinionStreet OpinionRecommendationRecommendation

AgendaAgenda

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Background / HistoryBackground / HistoryKey RatiosKey RatiosProjectionsProjectionsFinancingFinancingCapital Structure and CostsCapital Structure and CostsDividend PolicyDividend PolicyStock ValueStock ValueStreet OpinionStreet OpinionRecommendationRecommendation

AgendaAgenda

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Fast Company FactsFast Company Facts

Source: http://kraftfoodscompany.com

Largest food company in U.S. & World’s 2nd 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

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Products & OperationsProducts & Operations

Consumer Sectors (Net Revenues)

Segments (Operating Income)

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Source: 2011 10-K Filing

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Financial Statement AnalysisFinancial Statement Analysis6

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: Total Assets: $95.2B$95.2B

Total Liabilities: Total Liabilities: $59.3B$59.3B

Total Equity: Total Equity: $35.9B$35.9B

Total Debt: $28.7BTotal Debt: $28.7B

Operating Activities: Operating Activities: $3.75B$3.75B

Investing Activities: Investing Activities: ($7.46B)($7.46B)

Financing Activities: Financing Activities: $4.18B$4.18B

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

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AgendaAgenda

Introduction/Background/HistoryIntroduction/Background/HistoryKey RatiosKey RatiosProjectionsProjectionsFinancingFinancingCapital Structure and Costs Capital Structure and Costs Dividend PolicyDividend PolicyStock ValueStock ValueStreet OpinionStreet OpinionRecommendationRecommendation

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Turnover 2010 2009 2008 2007 2006Days In Inventory 52.96 53.11 50.67 56.28 56.97Receivables Turnover 7.53 7.77 8.97 7.17 8.88Payables Turnover 9.10 10.72 12.51 9.16 13.20Working Capital Turnover 7.64 7.76 8.34 7.12 7.20

Average No. of Days 2010 2009 2008 2007 2006Operating Cycle 88 81 73 91 78Cash Conversion Cycle 48 47 44 51 51

Short-term (operating) ActivityShort-term (operating) Activity

Sources: 1. Morningstar 2. http://finapps.forbes.com/finapps/jsp/finance/compinfo/Ratios.jsp?tkr=kft

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Efficiency 2010 2009 2008 2007 2006Fixed Asset Turnover 3.57 3.78 4.26 3.46 3.54Total Asset Turnover 0.52 0.61 0.67 0.55 0.62Equity Turnover 1.37 1.56 1.90 1.36 1.20

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Long-term (investment) ActivityLong-term (investment) Activity

Sources: 1. 2011 10-K Filing 2. http://www.stock-analysis-on.net/NYSE/Company/Kraft-Foods-Inc/Ratios

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Liquidity 2010 2009 2008 2007 2006Current Ratio 1.04 1.08 1.03 0.63 0.79Quick Ratio 0.58 0.64 0.54 0.34 0.39Debt 2010 2009 2008 2007 2006Debt-to-Equity 0.80 0.73 0.91 0.77 0.36Debt-to-Capital 0.44 0.42 0.48 0.43 0.26Valuation 2010 2009 2008 2007 2006P/E Ratio 13 13 14 19 19

Sources: 1. 2011 10-K Filing 2. http://www.stock-analysis-on.net/NYSE/Company/Kraft-Foods-Inc/Ratios

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Liquidity, Debt and ValuationLiquidity, Debt and Valuation

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Return on Sales (%)Industr

y(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

ProfitabilityProfitability

Sources: 1. Morningstar 2. 2011 10-K Filing

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Return on Equity Return on Equity Comparison Comparison (2010 Competitors)(2010 Competitors)

Source: http://investing.businessweek.com/research/stocks/financials/ratios.asp?ticker=KFT:US

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Valuation Kraft Industry S&P 500P/E Ratio 5-Year High 15.6 3.9 17.8P/E Ratio 5-Year Low 15.6 0.8 2.8

Profitability Kraft Industry S&P 500Gross Profit Margin 35.1 40.3 37.9Net Profit Margin 7.7 8.4 10.9

Return Investment (%) Kraft Industry S&P 500Return on Equity 11.4 25.5 19.1Return on Assets 4.6 8.3 7.5Return on Capital 4.6 12.5 10.0

Growth Rates % Kraft Industry S&P 500Sales 7.60 4.97 7.71Dividends 5.80

%8.33% 4.79%

5-Year Annual Averages5-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

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AgendaAgenda

Introduction/Background/HistoryIntroduction/Background/HistoryKey RatiosKey RatiosProjectionsProjectionsFinancingFinancingCapital Structure and CostsCapital Structure and CostsDividend PolicyDividend PolicyStock ValueStock ValueStreet OpinionStreet OpinionRecommendationRecommendation

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External Funds Needed $4.53BSustainable Growth Rate 5.99%Internal Growth Rate 21.12%COGS $33.6BAssets $102.5BLiabilities $63.8BNet Earnings $4.4BEquity $36.6B

ProjectionsProjections

Sources: 1. Forbes.com 2. http://www.marketwatch.com/investing/stock/KFT

Growth 7.6%

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AgendaAgenda

Introduction/Background/HistoryIntroduction/Background/HistoryKey RatiosKey RatiosProjectionsProjectionsFinancingFinancingCapital Structure and CostsCapital Structure and CostsDividend PolicyDividend PolicyStock ValueStock ValueStreet OpinionStreet OpinionRecommendationRecommendation

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FinancingFinancing17

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Sources and Uses for year ending December Sources and Uses for year ending December 3131

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AgendaAgenda

Introduction/Background/HistoryIntroduction/Background/HistoryKey RatiosKey RatiosProjectionsProjectionsFinancingFinancingCapital Structure and CostsCapital Structure and CostsDividend PolicyDividend PolicyStock ValueStock ValueStreet OpinionStreet OpinionRecommendationRecommendation

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Source: 2011 10-K Filing

Capital StructureCapital Structure20

Structured financially through Debt and Equity Debt-to-Equity: 0.80 Debt-to-Capital: 0.44 Not highly levered

44.5% 55.5%

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Volatility (Beta) Volatility (Beta)

A low risk / risk neutral Capital StructureA low risk / risk neutral Capital Structure Relatively low β = 0.55Relatively low β = 0.55

Between 0.55 and 0.63 for past 5 yearsBetween 0.55 and 0.63 for past 5 years Comparison to industry Peers – Most support a Comparison to industry Peers – Most support a

low low ββ

Industry performance is less volatile than marketIndustry performance is less volatile than marketSources: 1. 2011 10-K Filing 2. http://www.federalreserve.gov/releases/h15/update/ 3. http://finance.yahoo.com/q/ks?s=kft

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Cost of EquityCost of Equity

CAPMCAPM7.26% = 4.44% + 0.55 (9.56% - 4.44%)7.26% = 4.44% + 0.55 (9.56% - 4.44%)

Risk free rate based on 30-year Treasury rateRisk free rate based on 30-year Treasury rate Expected market return is CAGR for time period 1900–2010Expected 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

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Cost of DebtCost of Debt

Multiple periodic bond issuesMultiple periodic bond issues Good credit rating: Baa2 (Moody’s)Good credit rating: Baa2 (Moody’s) As debt is retired, Kraft issues new debtAs debt is retired, Kraft issues new debt

Average Cost of Debt Average Cost of Debt RRdd = 5.91% = 5.91%

Sources: 1. 2011 10-K Filing 2. http://www.federalreserve.gov/releases/h15/update/

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Bond Symbol Issuer Name Coupon Maturity Callable Moody's S&P Fitch Price YieldKFT.GZ KRAFT FOODS INC 6.5 2/9/2040 No Baa2 BBB- BBB- 107.6 5.945KFT.GU KRAFT FOODS INC 6.88 1/26/2039 No Baa2 BBB- BBB- 114.85 5.793KFT.GS KRAFT FOODS INC 6.88 2/1/2038 No Baa2 BBB- BBB- 112.444 5.94KFT.GP KRAFT FOODS INC 7 8/11/2037 No Baa2 BBB- BBB- 114.184 5.929KFT.GE KRAFT FOODS INC 6.5 11/1/2031 No Baa2 BBB- BBB- 106.307 5.963

Average bond yield 5.914Data taken from finra.org as of 3/24/2011.

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Relatively low Relatively low ββ (0.55) → (0.55) → RRe e = 7.26= 7.26%%

High credit rating → low High credit rating → low RRdd = 5.91% = 5.91% before tax before tax shieldshield

Corporate tax rate 31.5% → Further reduces Corporate tax rate 31.5% → Further reduces WACCWACC

Total Debt = $28.7B, Market Value of Equity = Total Debt = $28.7B, Market Value of Equity = $54.7B$54.7B

WACC = 6.15%

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Cost of CapitalCost of Capital

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AgendaAgenda

Introduction/Background/HistoryIntroduction/Background/HistoryKey RatiosKey RatiosProjectionsProjectionsFinancingFinancingCapital Structure and CostsCapital Structure and CostsDividend PolicyDividend PolicyStock ValueStock ValueStreet OpinionStreet OpinionRecommendationRecommendation

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Dividend PolicyDividend Policy

Initial Public Offering (IPO): June 13, 2001Initial Public Offering (IPO): June 13, 2001

Prospectus provides Dividend Payout PolicyProspectus provides Dividend Payout Policy Dividends to be paid quarterlyDividends to be paid quarterly

Dividend Reinvestment Program managed by Wells Dividend Reinvestment Program managed by Wells FargoFargo

Fiscal year: January 1 – December 31Fiscal year: January 1 – December 31

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Source: https://us.etrade.com/e/t/home/beta-a?PageName=3X-horiz?PageName=hp_beta

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Source: http://www.dividend.com/

Dividend HistoryDividend History

2010 2009 2008 2007 2006Dividends declared per share 1.16 1.16 1.12 1.04 0.96

Dividend growth 3.57% 7.69% 8.33% 10.34%

Total Dividend paid out (in million) 2027.68 1714.48 1645.28 1595.36 1570.56

Dividend Payout Ratio 48.99% 56.62% 56.87% 58.57% 51.24%

Dividend Yield 3.68% 4.27% 4.17% 3.19% 2.69%

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AgendaAgenda28

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Source: http://moneycentral.msn.com/investor/charts/chartdl.aspx?symbol=US:KFT

Price HistoryPrice History

KFT Current Market Price: $31.16

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Constant dividend = $1.16Constant dividend = $1.16 Discount Rate = 7.26%Discount Rate = 7.26% Retention Ratio = 51%Retention Ratio = 51% ROE = 11.52%ROE = 11.52% Dividend Growth Rate = 5.87%Dividend Growth Rate = 5.87% Market Value of a Stock = Market Value of a Stock = $31.16$31.16

Value of a Stock (DDM) = Value of a Stock (DDM) = Dividend per Share Dividend per Share = $83.95= $83.95

Discount Rate – Dividend Growth Discount Rate – Dividend Growth RateRate

Value of a Stock Value of a Stock = = Debt + Equity Debt + Equity= $36.99= $36.99

(Total Corporate Value Model) # of shares outstanding(Total Corporate Value Model) # of shares outstanding

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Stock ValueStock Value

Page 31: Financial Analysis: Kraft Foods Inc. (KFT)

AgendaAgenda

Introduction/Background/HistoryIntroduction/Background/HistoryKey RatiosKey RatiosProjectionsProjectionsFinancingFinancingCapital Structure and CostsCapital Structure and CostsDividend PolicyDividend PolicyStock ValueStock ValueStreet OpinionStreet OpinionRecommendationRecommendation

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Street OpinionStreet Opinion

Analysts’ ThoughtsAnalysts’ Thoughts

Asian Market PotentialAsian Market PotentialCadbury AcquisitionCadbury Acquisition

Current Market Value: Current Market Value: $31.16/Share$31.16/Share Calculated Stock Value based on DDM: Calculated Stock Value based on DDM: $83.95/Share$83.95/Share Calculated Stock Value based on TCVM: Calculated Stock Value based on TCVM: $36.99/Share$36.99/Share

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AgendaAgenda

Introduction/Background/HistoryIntroduction/Background/HistoryKey RatiosKey RatiosProjectionsProjectionsFinancingFinancingCapital Structure and CostsCapital Structure and CostsDividend PolicyDividend PolicyStock ValueStock ValueStreet OpinionStreet OpinionRecommendationRecommendation

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StrengthsStrengths• Excellent Excellent Reputation and ImageReputation and Image• Marketing Expenditure Paying Off Marketing Expenditure Paying Off • New Focus on Innovation and New Focus on Innovation and SuccessSuccess• Sucessful Core Brands Sucessful Core Brands • Strong organic top-line growthStrong organic top-line growth

OpportunitiesOpportunities• Cadbury acquisition - New markets Cadbury acquisition - New markets • Leverage value proposition to Leverage value proposition to compete against other brandscompete against other brands• Correctly predict and interpret Correctly predict and interpret changes in consumer preferences changes in consumer preferences and demandand demand

ThreatsThreats• Increased or unanticipated costs Increased or unanticipated costs of Cadbury integrationof Cadbury integration• Increase in Commodity CostsIncrease in Commodity Costs• Changes in relationships with Changes in relationships with significant customers or supplierssignificant customers or suppliers• Currency RiskCurrency Risk

WeaknessesWeaknesses• Average Operating ResultsAverage Operating Results• Subject to risks associated with Subject to risks associated with operating in a global marketplaceoperating in a global marketplace• Pressure on European Sales Pressure on European Sales • Highly competitive industryHighly competitive industry

SWOT ANALYSIS: Kraft Foods Inc. (KFT)SWOT ANALYSIS: Kraft Foods Inc. (KFT)34

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BUY

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We remain confident that we will We remain confident that we will deliver earnings growth in 2011 that’s deliver earnings growth in 2011 that’s

both ahead of our long-term targets both ahead of our long-term targets and within the top tier of our peer group.and within the top tier of our peer group.

~ Irene Rosenfeld, Chairman and CEO~ Irene Rosenfeld, Chairman and CEO

Questions?Questions?36

Source: http://www.marketwatch.com