Will Kraft Foods (KRFT) Miss Earnings on Higher Input Costs?

Kraft Foods Group, Inc. KRFT is set to report second-quarter fiscal 2014 results on Jul 30, after the market closes. Last quarter, the company delivered in-line results. Let's see how things are shaping up for this announcement.

Factors to Consider this Quarter

Kraft's top line has been soft ever since the split from Mondelez International Inc. MDLZ in Oct 2012 due to broader macro pressures. Several of its product categories — salad dressings, powdered beverages and ready-to-eat desserts — have been soft for the past few quarters due to lower consumption and increased competition. Changes in consumer preferences, their shopping behavior and tough consumer spending environment are hurting retail sales.

Further, rising commodity costs is a major margin headwind for the food companies. The costs of Kraft's key ingredients — cheese, meat and grains — have risen sharply in the recent past. Costs of cheese, meat and coffee are expected to rise further in the coming quarters, thereby crippling margins. Kraft has already raised or announced price increase for around 45% of its products to cover the rising costs. Management anticipates temporary market share losses due to price increases.

Nevertheless, Kraft expects sales to pick up in the second quarter gaining from the Easter shift. Moreover, Kraft has activated new ad campaigns in the second quarter. This, coupled with innovation in Oscar Mayer, Planters, and Philadelphia brands, should lend top-line support. However, the challenged U.S. food consumer environment and possible volume/market share erosion due to price increases may put pressure on the top line.

Earnings Whispers?

Our proven model does not conclusively show that Kraft is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here, as you will see below.

Negative Zacks ESP: The Earnings ESP is -2.41% as the Most Accurate Estimate stands at 81 cents per share, while the Zacks Consensus Estimate is higher at 83 cents.

Zacks Rank: Kraft carries a Zacks Rank #4 (Sell). We caution against stocks with Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider

Other food stocks that have both a positive Earnings ESP and a favorable Zacks Rank are:

Treehouse Foods, Inc. THS, with an Earnings ESP of +1.21% and a Zacks Rank #1 (Strong Buy).

The J.M. Smucker Co. SJM, with an Earnings ESP of +1.46% and a Zacks Rank #3 (Hold).