Earnings Preview: Analysts Mindful of Price Hikes at Kraft

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April 29, 2008

NEW YORK—Food and beverage maker Kraft Foods Inc. reports earnings for the fiscal first quarter on Wednesday. The following is a summary of key developments and analyst opinion related to the period.

OVERVIEW: The Northfield, Ill.-based company, which makes Nabisco cookies, Oscar Mayer meats and Post cereals, was weighed down by record-high dairy prices last year. Until recently, Kraft refrained from raising prices on its products to offset higher input costs, and instead reinvested in its major categories in order to improve brand recognition.

Analysts expect Kraft's results to provide some overall economic insight into consumer spending trends.

BY THE NUMBERS: Analysts, on average, anticipate earnings of 40 cents per share on sales of $9.77 billion, according to a poll by Thomson Financial.

ANALYST TAKE: Lehman Brothers analyst Lauren Lieberman said the first quarter could prove to be the most challenging of the year for the packaged food industry, in terms of year-over-year inflationary pressure. Kraft recently raised prices on about 90 percent of its North American portfolio, she said, and the first quarter will be the first to show the effects of these higher prices, particularly on volume.

Lieberman said that investors should be attuned to the fact that the company reports volume growth in tons, which could exaggerate the extent of the falloff if, for example, heavier products were to weaken more than others.

"Although Kraft's 2007 top-line progression was impressive, we remain concerned with the company's inability to take pricing without suffering demand elasticity," wrote Deutsche Bank analyst Eric Katzman in a recent note to investors. "Kraft's need to heavily invest in its brands makes margin preservation even more difficult in an inflationary environment."

However, Katzman said scanner data suggests that Kraft is gaining traction in invested categories and expects the company to meet analyst estimates in the first quarter, despite significant margin pressure.

WHAT'S AHEAD: For the full year, Kraft anticipates adjusted earnings of at least $1.90 per share, and projects long-term earnings-per-share growth of between 7 and 9 percent.

Analysts, on average, estimate 2008 earnings of $1.89 per share.

STOCK PERFORMANCE: Kraft shares slipped 5 percent during the quarter to close at $31.01.