Stock Pick: Kraft Foods (KRFT) is struggling to make it on its own

Slow growth requires patient investors

Stock chart showing trailing 12-month stock chart for Kraft Food Group Inc.

In September 2012, Kraft Foods made a major move by spinning off its high growth candy business into a separate company. Kraft Foods Group Inc. (NASDAQ: KRFT) would retain the most popular brands — Jell-O, Oscar Mayer, Kool-Aid and its Kraft Dinner mac and cheese—while the new operation, Mondelez International, would get Cadbury, Chips Ahoy and Nabisco, among other names. It’s been so far, so good for the new Kraft group, with its stock up 14% over the last 12 months. But investors may have to be a more patient going forward.

On February 13, Kraft released its Q4 results and its first full year numbers since the spinoff—it technically became a new company when it separated—and the news was mixed. Its fourth quarter earnings per share came in slightly above estimates, while revenues of $4.6 billion were slightly below the street’s $4.63 billion prediction. It’s also had some growth challenges—organic sales only expanded by 3.2%—but many of its peers face similar issues.

Most analysts would have liked to have seen more from the company, but they’re not counting it out. This year could be a big one for Kraft, wrote Erin Lash, a senior stock analyst with Morningstar—in part because it’s finally past the drama that comes with splitting a company.

“Kraft’s first year as an independent organization has not been easy, given the significant noise resulting from the split combined with an ultra-competitive operating environment,” she wrote in a February 13 report. “However, we think the firm is on its way to demonstrating the appeal of a more focused domestic foods business.”

She expects to see 3% to 4% sales growth per year going forward, while operating margins will grow to 18.5% by 2017, which is 300 basis points above the its five year average.

Jason English, an analyst with Goldman Sachs, is pleased with the company’s cost cutting measures and says it has an “intriguing cost cut, cash flow and dividend story.” Its currency yield is an attractive 3.9%.

Right now, English has a neutral on the stock and Lash has a hold. For that to be a buy, the entire industry would have to see better top-line growth, but Kraft will have to become more innovative too. Kraft’s track record of innovation, Lash says, is “in a word, dismal.”

If you’re a current Kraft stock holder, then hang on to the stock. It’s trading at what Lash says is fair value, but she has a sell price target on it of $71.55, meaning it is possible for the stock to head higher. English has a 12-month price target of $55, about $2 higher than where it’s at today.

If Kraft can push ahead post-split and do what this new company has set out to do—gain more ground in the North American market—then it could be a good buy for investors hungry for reliable returns, if you’re willing to be patient.