Has Kraft Foods Become the Perfect Stock?
Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Kraft Foods (NYS: KFT) fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
- Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
- Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
- Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
- Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
- Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.
With those factors in mind, let's take a closer look at Kraft Foods.
What We Want to See
Pass or Fail?
5-Year Annual Revenue Growth > 15%
1-Year Revenue Growth > 12%
Gross Margin > 35%
Net Margin > 15%
Debt to Equity < 50%
Current Ratio > 1.3
Return on Equity > 15%
Normalized P/E < 20
Current Yield > 2%
5-Year Dividend Growth > 10%
4 out of 10
Source: S&P Capital IQ. Total score = number of passes.
When we looked at Kraft Foods last year, it weighed in with the exact same score. The food giant has seen some improvement in revenue growth and on its balance sheet, although margins and return on equity both took hits.
Kraft is a household name in the U.S. and has increasingly broadened its recognition in a global marketplace. The company's much-ballyhooed acquisition of Cadbury last year hasn't gone perfectly, but it has led to a substantial boost in revenue as it leaves the company better able to tap into international markets.
But just a couple of months ago, Kraft finally gave in to activist investors calling for a breakup of the company. Kraft now plans to split off its North American grocery business, which includes its iconic mac-and-cheese brand and makes up about a third of Kraft's overall revenue, as a separate company. The surviving business will focus on its lines of snacks and candy and have more international exposure. The move follows similar announcements from Sara Lee (NYS: SLE) and Ralcorp (NYS: RAH) .
It's clear that Kraft faces huge competition. Earlier this year, Kraft lost its exclusive right to distribute Starbucks (NAS: SBUX) coffee in stores, freeing the coffeehouse giant to make a deal with Green Mountain Coffee Roasters (NAS: GMCR) . With food inflation pressures hitting both Kraft and its competitors, players throughout the industry are doing everything they can to keep margins up and costs down.
In order for Kraft to get closer to perfection, it really needs to stop making major strategic changes and instead focus on what it does best: leveraging a world-renowned brand into tasty and highly appealing food products. If it can survive its coming split-off without much trouble, then maybe that's the direction Kraft will move next.
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.
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At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Starbucks. Motley Fool newsletter services have recommended buying shares of Starbucks and Green Mountain Coffee Roasters, as well as creating a lurking gator position in Green Mountain Coffee Roasters. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.
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