Q3 Preview: Kraft (KFT) Investors Focus on Split Heading into Results

Kraft (NYSE: KFT) is trading higher Wednesday, heading into third quarter results, expected out before the market opens Thursday morning.

The Street is looking for earnings of 55 cents per share on revenue of $12.80 billion. Earnings would be a dip from 62 cents reported last quarter, and gain of 17 percent over the same period last year.

Shares moved 3.9 percent lower in the quarter, to $33.58 at the end of September. The stock is up 3.1 percent since then, and up 12.8 percent on the year.

Last quarter, Kraft reported carrying a book value of $22.08 per share, and cash of $1.33 per shaer. Kraft is trading for 13.3 times next years earnings, ex cash, compared with 14.5 times for Coca-Cola (NYSE: KO), and 12.9 times for Pepsico (NYSE: PEP).

Data from Bloomberg has 15 analysts with a Buy rating on Kraft, 6 at Hold, and zero at Sell. The Street's price target average is $39, with a low of $33 and high of $42. Kraft has traded within a range of $29.80 to $36.30 over the last 52-week time frame.

Analyst Comments

• Goldman Sachs is looking for earnings of 55 cents with organic sales growth of 7.5 percent and 14 percent operating margins.
  
  Commenting into the quarter, "We believe investors will likely focus on (1) North America revenues and in particular continued revenue synergies in the US Snacks business and recovery in top-line performance at Gum & Candy, (2) pricing increase impact and elasticity in Europe, and (3) additional details on cost/operational advantages of the announced split."
  
  Goldman sees pressures in North America sales from Beverage and Cheese given higher coffee and dairy costs, saying, "The EBIT margin in its highly commoditized Cheese businesses generally reflects the 1Q lagged trend in commodity prices. We see stronger margin gains relative to 2010 in Grocery given easier comparisons. Recent Nielsen data suggests volumes roughly flat but an uptick in pricing in 3Q."
  
  
• Wellls Fargo is looking for earnings of 58 cents per share, a little richer than Street views. Wells is modeling for 6.8 percent organic sales growth, with 4.6 percent gains in pricing and 2.2 percent of volume/mix. Commenting, "We estimate that gross margins increased ~20 bps y/y as pricing and productivity savings more than offset input cost inflation. We estimate that operating margins increased ~70 bps driven by the gross margin increase and a modest reduction in marketing, administrative and research expense as a percent of sales."
  
  
• Deutsche Bank is modeling for earnings of 53 cents per share, and $12.8 billion in sales. Commenting, "It is unclear over the next 15-18 months how much quarterly fundamentals matter. With Kraft splitting in 2 and numerous questions (i.e. leadership, capital structure, growth objectives, shared brands) still unanswered, it isn’t clear what will drive stock performance. Ironically enough, we see SnackCo as struggling vs. a stronger GroceryCo today."

Stay tuned to StreetInsider.com's EPS Insider section to see our analysis of the highly-anticipated quarterly results within seconds of their release. You can also check out Kraft's past performance at Streetinsider's Kraft Income Statement.

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