January 30, 2008

Earnings Review

I want to go quickly over some earnings announcements of recently analyzed businesses:

Kraft Foods:

As we discussed food input costs are racing away, which makes food manufacturers hard to make any meaningful profit growth. KFT recent results just echoes this thesis. Its dairy input costs squeezed its margins. KFT is in a tough situation, as it can't raise prices significantly for fear of losing market share. Other food companies like Kellogg's came with disappointing results because of rising input food prices.

Most of food companies like UN, KFT, K have came off their highs in the last couple months declining between 10-15% in line with the market in general. however, when you consider these businesses as stable and low beta, their declines are more attributed to the tough food input costs rather than general market decline.

I still like UN as a business due to its portfolio of consumer products. Although it came off its highs, I think for a value idea I will wait a bit further.


Today MO came with its much anticipated results. As expected it delivered good quarter with growing international market and declining to maturing US market. It also announced it will spin off its international tobacco to its shareholders. Like I have discussed before, the events are reflected in the stock and it is trading at fair value, see my post here, as a result it stock did not move much with the announcement.

I think there will be an opportunity to own MO after March 28, the date for the its tobacco international spin off. MO will be dumped by significant institutional holders as they want out of a mature and litigation prone US division and will be owning the growing international business. MO will be trading at a discount and high dividend yield, I anticipate it to be in the 5-6% range, if my thesis is right. I think that when you want to consider it as a position in your portfolio, not now.

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