Kraft Food company

Kraft Food Company
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The Company, Industry and Competitors
Kraft foods Group, Inc (KRFT), is a company in the food industry which is a major diversified sector. Among the direct competitors in the sector are Con Agra Foods Inc (CAG), The Hillshire Brands Company (HSH), and Nestl, (NSRGY). The company was originally known as Kraft Foods Inc, a spin-off of the Mondelez International. Additionally, the company is one of the most recognizable dealer in beverages and consumer/ packaged food in the North American market. Essentially, Kraft Foods Company is mainly focused in North America, while Mondelez is into the global market.
The companies sells an array of brands to the US and Canada, for products categories in breakfast, lunch and dinner at specific locations and for home users. The company’s distribution networks relies on wholesalers, convenience stores, supermarket chains, club stores, gasoline stations, drug stores, mass merchandises and supercenters. Nowadays the company is now focused on two separate but interrelated segments of meals and deserts, while the other business unit focuses on snack nuts. The North American market is mature and this may pose challenges to the segment catering to consumer needs in this market. Thus, there is a need to review the long term growth strategy for the company and the two spin-offs.
Even though, the company has over 20 brands in the North/America market, there are three major brands of Kraft dressings, cheeses and dinners typically available in Maxwell House coffees and Oscar Mayer meets. Thus, the company is well represented in five major business segments US cheese, US beverages, US grocery, US convenient meals and the Canada & N.A foodservice. The beverages sector manufactures both juice drinks and coffee, while cheese varieties include various processed cheese options. The US grocery segment is one of the biggest contributors to the net revenues, while Canada and foodservice segment contains the main brands that are span off to other segments.
Kraft Foods Group is a stable company, and though it is not a high growth company, the company has consistently improved share holder returns. The main strength for the company is that it has a reputable brand in the food and beverage segment, but like other players in the food segment the company is vulnerable to commodity price swings, but these costs merely represent a fraction of the total expenses. The company is strategizing on utilizing low prices while also improving the profit margins. This is possible with the company’s efforts towards increasing the distribution network. Even though, the price of Kraft Food products is lower in comparison to the products of its competitors, there is a need to undertake an evaluation to determine whether the company’s stock is undervalued.
Financial Performance Analysis
Financial performance analysis determines whether an organization is performing well, and the management should take steps to improve operations form this information. Furthermore, investors require information to make decisions, while the management also requires the information that identifies competitive strengths and areas that provide opportunity for growth. Financial performance analysis also helps to keep track of changes in an organization, where it is easer to make adjustments when there is available information is useful for enhancing future growth prospects. In the case of Kraft Food, the financial performance analysis will be critical to building a stronger business through maximizing on opportunities already identified. Evaluating performance of the company over time and comparing with the industry performance give an overview about the company performance and business viability.
One of the man concerns for the company is that revenues have been relatively flat for the last few years, and the diversification efforts might not be working. Even though, the food sector is competitive, there is a need to attract more customers. Essentially, the company has dealt with the cost of goods sold to improve the net income, but the strategy of managing these costs related to sales may not be viable in the long term if the competitors also follow the same route. Furthermore, managing the selling, general and administration expenses has been fruitful for the company because this has led to an increase in operating income in the last few years, but there is a need for better strategies to improve growth prospects in the North American market if the company is to increase its market share and remain competitive in both the foods and beverages sector.
The current ratio of the company has improved marginally between the years ended 31st December 2011 to 2013, from 127% to 134% and finally 144%. Similarly, the acid test ratio improved from 52%, to 80% and 97 % for the three years (Nasdaq, 2014). Essentially, Kraft foods is able to cover the short term obligations as the current ratio is above the 1: 1 threshold, but the quick ratio is lower than 1: 1, but it has improved over the three year financial period. Thus, the management needs to better manage the current assets for the company to adequately cover short term liabilities with liquid assets. Nonetheless, the company performance mirrors what is happening in the foods industry, which has slow growth, while the industry is also competitive
Other indicators show that the company needs better growth strategies, as changes in performance have been marginal. The Gross margin improved to 37.5% in 2013 from 31.6% in 2011, showing that the company has a higher level of gross profit in relations to sales, and the operating margin has been on an upward trend. However, as pointed out improvement in results has mostly been a result of cost cutting and containment measures. This has further led to growth in the level pre- tax and after tax ROE, and this has been the most impressive from a mere 11% after tax ROE to 52% in the year 2013 (Nasdaq, 2014). For the investors, the ROE is an indicator that there is wealth maximization , but further analysis shows that limited growth in future will likely lead to investors having low confidence in the company’s ability to remain competitive with major players in the industry.
Cost of Capital, Capital Structure Analysis and Distributions
The cost structure of the company affects investors and creditor’s decision especially when they look at the level of debt levels in a company. For instance, an increase in the debt level results to a rise in interest expenses paid and the taxable income also recues. Essentially, increased debt is accompanied with a rise in interest expense, and hence an organizations needs to use the cash flows to cover for the rise in interest expenses. This has a negative impact on the company as potential creditors are likely to interpret this as burdening the organization in meeting the financial responsibilities of the organization. Furthermore, this is likely reduce the Earning Per Share, which in turn leads to a lower stock price making investors nervous about the company’s performance. One of the challenging aspects in managing Kraft foods is on maintaining an optimal Debt and Equity mix.
Even though, the level of long term debts has only increased marginally from 2011 to 2013, the debt to equity ratio is still higher than 1. The rate seems to have reduced because of an increase in equity stockholders rather than a reduction in the level of long term debts. Following a valuation of the stock price, it was estimated that the cost of capital is 12%, and since the cost of debt is almost the same the management should strategize on how to reduce the debt without compromising on cash flow, as sudden retirement of the loan may create cash slow problems making it harder for the company to manage liquidity. Another concern is that the company has been aggressively finan...