Market Overview

Does the Hostess Bankruptcy Affect the Kraft Trade?

Kraft Foods (NYSE: KFT) has announced its EPS for FY2011 is expected to rise to $2.28, a penny increase on previous expectations of $2.27. The news comes shortly after announcements were made that the company would cut 1,600 jobs. The company's stock price rose to a 52-week high of 38.38 and is near that level in intraday trading.

Kraft, traditionally a stalwart food stock with a dividend that has remained unchanged since a 2 cent increase in late 2008, has risen steadily as net profit margins jumped to 7% in 2011. The cut in personnel, set to take place throughout the United States and Canada, should make the company even more profitable in 2012. Those cut jobs are mostly white-collar positions in sales and corporate and business operations, while manufacturing positions will remain untouched.

The decision to leave manufacturing positions untouched reflects the steadily increased demand for Kraft's products, which has helped maintain the firm's revenue. More importantly to the company's bottom line has been its decision to spin off its grocery business in North American markets and its decision to sell assets in eastern European markets. The selloffs have helped the company trim its debt and increase its profit margins, although its corporate bonds have maintained low ratings and its debt to earnings ratio remains uncomfortably high. Its total liabilities are 61% of its total assets, of which only 18% are current. Current liabilities have stayed steady at around $20 billion.

2011 was not an easy year for the company, especially after a jump in commodity prices caused the firm's current assets to fall slightly from above $17.5 billion to just over $17.3 billion in 2011. The company's flat assets for 2011 have been met by flat current liabilities at around $20 billion for Q2 and Q3 2011.

Investors might want to take a careful look at Kraft in the coming months not only because its stock is hitting a 52-week high, but because the recent Hostess bankruptcy might encourage the company to make a bid for the Twinkie-yielding company. Hostess currently employs 19,000 employees and holds the trademark for several iconic American snacks, including Twinkles, Ho-Hos, and Ding Dongs. The long-standing tradition of these food snacks being sold at convenience stores across the U.S. makes it almost unthinkable that they would disappear from the shelves. A takeover from a more organized firm might help save the Twinkie and bring the snack food company back to profitability. Kraft Foods wouldn't be the only potential buyer for the company, with General Mills (NYSE: GIS):, J&J Snack Foods (NYSE: JJSF), and even Kellogg (NYSE: K) possible buyers.


ACTION ITEMS:

Bullish:
Traders who think Kraft hasn't reached its full potential yet might want to look into acting on the news of layoffs plus the slight jump in EPS. These news items, combined with the possibility of a Hostess takeover, could make Kraft a relatively safe speculative play in the coming months.
Bearish:
Traders who believe that Kraft won't take over Hostess and are concerned about the company's inability to lower its debt might want to take advantage of the current high point in the stock by selling it short, or they could look at investing in competitors in the sector. If you think that snack foods are losing their appeal as Americans start to get more weight conscious, an investment in Kellogg might be a safer bet. Kraft has only a limited investment in low-cal foods, while Kellogg is historically associated with healthy snacks and cereals.
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

Posted-In: Hostess BrandsEarnings News Guidance Previews Trading Ideas Best of Benzinga

 

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