Is Kraft Expensive or Undervalued?

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With shares of Kraft Foods Group (NASDAQ:KRFT) trading at around $54.51, is KRFT an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Many investors are staying away from Kraft because it only has domestic operations, which leads to limited growth potential. However, Kraft shouldn’t be looked at as a growth play. This is a company that should be able to deliver consistent profits and return capital to shareholders through dividends and share buybacks. Currently, Kraft yields an impressive 3.70 percent. This is higher than the 3.00 yield for ConAgra Foods (NYSE:CAG) and the 1.40 percent yield for Hillshire Brands Company (NYSE:HSH).

As far as growth for Kraft, it has an expected five-year growth rate of 6 percent, which is below the industry average of 7 percent. Kraft has increased its advertising and brand building efforts. This has the potential to help the top line, but even employees have been frustrated by the company’s lack of investment in new brands.

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Kraft delivered a strong Q1. Gross profit increased 3.7 percent year-over-year, operating profit increased 9.2 percent year-over-year. Organic revenue for the Cheese segment increased 5.5 percent. However, organic revenue for the Grocery segment declined 0.4 percent. Overall, revenue increased 2.10 percent year-over-year, and earnings declined 5.60 percent year-over-year. These numbers can be a bit misleading considering the direction of the company. While there is some innovation, cost-cutting has been a major focus, which has made this a leaner and more profit-focused company.

Many investors would like to know as much information as possible about Kraft since it has ventured out on its own. One good way to find out what’s going on at the company is to take a peek inside. In other words, what do employees feel about the company? According to Glassdoor.com, employees have rated their employer a 3.4 of 5, and 68 percent of employees would recommend the company to a friend. These numbers indicate a slightly above average company culture. In regards to leadership, 89 percent of employees approve of CEO Tony Vernon. This is a high number, which is a good sign.

On the negative side, Berkshire has reduced its stake in Kraft by 4.0 percent and competition has increased. A 4.0 percent decline in Berkshire’s stake isn’t major and shouldn’t be cause for any alarm. As far as competition goes, this should be expected. Therefore, these aren’t major negatives.

Sticking with the competition theme, Kraft is trading at 20 times earnings whereas ConAgra is trading at 28 times earnings and Hillshire Brands is trading at 5 times earnings. Many investors feel that Kraft is expensive here. However, the industry a is trading at 24 times earnings.

Let’s take a look at some important numbers prior to forming an opinion on this stock.

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