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Kraft Foods Can Bring Home the Bacon for Investors

By Wall and Main FOXBusiness

Deflation has been a growing topic of conversation and the substantial fall in oil prices has, of course, been one of the primary drivers. 

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With domestic storage capabilities looking tapped out, there has been much conversation about the next leg in oil prices. Increasingly, it looks like we will be awash in supply that will at least keep oil prices low for some time or at best (if you’re a consumer) push gas prices even lower. This has led to a growing number of companies, like CONSOL Energy (CNX), Noble Energy (NBL), Husky Energy (HSE), Linn Energy (LINE), BP (BP), Chevron (CVX) and among others to slash capital spending projects and jobs.

While this aspect of deflation is bad for the oil companies, there are other aspects of it that can be a boon to companies. Quite frankly I am amazed at how many investors forget about the cost side of the equation. Granted most tend to see revenue and its growth as one of the key determinants in margin and earnings leverage. You have to remember that declining costs can be a powerful contributor to the bottom line as well. I make a big deal about this as the faculty advisor for New Jersey City University’s Student Investment Management Group and its something I focus on for The Thematic Growth Portfolio.

If you simply assumed -- you know what they say about assuming -- that oil prices were the only culprit behind the deflation we are seeing then you’d be missing something. Food prices declined 1.6% in February after declining 1.1% in January. That’s the third consecutive monthly decline in food prices we've seen.

Some of the biggest reductions have happened in pork, corn, sugar, coffee and cheese commodity prices. All are down big during the last year, particularly pork, sugar and cheese prices, which have fallen by hefty double-digit percentages during the last year. Over the last year Kraft Foods (KRFT) has increased prices in its meat, cheese and coffee businesses -- I’m sure you’ve noticed this at the grocery store. Some of the company’s brands include Kraft Singles, Oscar Mayer, Kraft Macaroni & Cheese, Cracker Barrel and a number of others. Odds are those products are in your home just as they are in millions across America.

Although it may be a little painful to pay for, those price increases combined with the drop in key commodity prices bode very well for stronger-than-expected margins and earnings growth in the coming months. Unsurprisingly, Wall Street expectations have changed very little over the last few months despite these falling input costs. This very much reminds me of Starbucks (SBUX) shares back in August 2012 when its business benefited from prior price increases and the then drop in coffee prices. The result led Starbucks shares to soar over the following 18 months as the company expanded its food offering and geographic footprint, something its improved cost structure helped facilitate.

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Two other reasons to be bullish on Kraft and its shares are its industry presence that positions it to be an acquirer of other food products and its status as an emerging Dividend Dynamo company. Since being split from the legacy snack and confectionery company that is now Mondelez International (MDLZ) in 2012, Kraft has increased its quarterly dividend twice and management has commented that it looks to return even more capital to shareholders. The current dividend yield is 3.6%, and as the company increases its pay-out, I would expect a step up in share price over the coming quarters.

In my view, the news in the last twenty-four hours that the company is recalling 6.5 million cases of its Kraft Macaroni & Cheese, which has pulled Kraft shares modestly, only sweetens the risk-to-reward profile for investors.

Chris Versace has no position in KRFT shares, but The Thematic Growth Portfolio that he manages is long KRFT shares.

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