Monday, March 03, 2008

Why did Buffett and BRK buy stock in Kraft ?

Why did Buffett and BRK buy stock in Kraft ? Let's examine the reasons together.Brands? Costs Controls? Expanding Markets? Share Buybacks? Irene Rosenfeld?

Berkshire Hathaway, bought more than 132 million shares of food company Kraft, according to a document filed with the Securities and Exchange Commission Thursday. Kraft Foods Inc. (KFT), through its subsidiaries, is engaged in the manufacture and sale of packaged foods and beverages in the United States, Canada, Europe, Latin America, Asia Pacific, the Middle East and Africa. The Company manufactures and markets packaged food products, consisting principally of beverages, cheese, snacks, convenient meals and various packaged grocery products. The Company operates in two segments: Kraft North America Commercial and Kraft International Commercial. It has operations in 72 countries and sells its products in more than 155 countries.

Kraft Foods, KFT has a (5-year annual average) net income growth rate of negative 4.71 . The company is looking forward to a 7-9% forward growth rate. What competitive advantages does it have? Brand, Technology, Cost of Production, Distribution Network? Are possible advantages sustainable? It's current market price is 29.31

The estimated Intrinsic Value, using an assumed 7% forward growth rate, is 43.39 per share from, and this may or may not indicate a bargain of 14 dollars. Is it a possible Value Trap? If the 7% growth assumptions used in estimating the Intrinsic Value are accurate and sustainable, this may or may not indicate a price-to-value ratio of .67 , and a possible margin of safety of 33 percent in a good company with good brands selling at a fair price.

The current price/earnings ratio = 18.2 It's current return on capital = 5.41 Using a debt to equity ratio of .77, Kraft Foods shows a current return on equity = 9.32 Some industries have higher ROE because they require no assets, such as consulting firms. Other industries require large infrastructure builds before they generate a penny of profit, such as oil refiners. You cannot conclude that consulting firms are better investments than refiners just because of their ROE.

Generally, capital-intensive businesses have high barriers to entry, which limit competition. But high-ROE firms with small asset bases have lower barriers to entry. Thus, such firms face more business risk because competitors can replicate their success without having to obtain much outside funding. Automatic Warning, ( above 0.5 ) on this current debt to equity level of .77

From 2007 excerpts, the company expects that revenue will grow 3% to 4% on an organic basis in 2008 and that "we'll hit our stride" by 2009, said Chief Executive Irene Rosenfeld in a written release. "We'll fully realize the financial benefits of our investments and deliver our long-term targets of at least 4% organic net revenue growth and 7% to 9% EPS growth." In addition to "rewiring" the company, Rosenfeld said Kraft intends to "reframe" its product categories to make them more relevant to consumers, to better exploit its sales abilities and to drive down costs.

One key is to expand the focus in larger, faster-growing categories. As an example, Rosenfeld cited moving away from dying sectors like processed cheese slices and into sandwich, snacking and high-end cheeses. Also important is grabbing market share away from restaurants, she said, vowing that Kraft will strive to provide "restaurant-quality food at home in the office or anywhere ... at a fraction of the cost." Frozen pizza's a case in point. With brands like Jacks' and Tombstone, Kraft has long been a major player in the $4 billion category. Then, about 10 years ago it went after the $11 billion chain business with higher-end offerings like DiGiorno. And now, Rosenfeld said, "we are setting our sights on the $20 billion local pizzeria" category.

Does Kraft Foods make for an intelligent investment or speculation today? Time is said to be the friend of the wonderful company and the enemy of the mediocre one. Before making an investment decision, seek understanding about the company, its products, and its sustainable competitive advantages over competitors. Next, look for able and trustworthy managers who are focused more on value than just growth.

Finally ask: Is there a bargain relative to its intrinsic value per share today? In terms of Opportunity Cost, is KFT the best place to invest your money today? I do not know enough about KFT, but, I am open to talking and discussing Kraft.

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