Some large packaged food names in the U.S. are expanding internationally through investment events and acquisition activity, some splitting their domestic operations from their emerging markets operation in an attempt to realize upside from all of the different market circumstances, says Alexia Howard, an Analyst at Sanford C. Bernstein & Co., LLC.
“But for the large packaged food companies with no event-driven story, I am cautious,” she said. “Valuations are stretched, they’ve come in a bit as we’ve seen positive earnings revisions in other sectors, but relative valuation is still stretched versus the market.”
Howard recommends Kraft Foods Inc. (KFT) as an “outperform” stock. She says KFT managed to increase its sales in emerging markets through its acquisition of Cadbury and now the company has opportunities for revenue synergies as it pushes Kraft products into Cadbury’s distribution channels. KFT also plans to split its international operations from its domestic business, Howard said.
“There is not value to be created directly through the split, but it creates two different companies with very different mandates,” she said. “The North American grocery business will be a cash-generative, fairly stable business that is focused predominantly in the U.S. But the other business will be a global snacking business that has all of the margin upside opportunity and strong revenue growth potential.”
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