Kraft Food Inc

EIC Analysis

Economy

There are many things that may happen in the world that could affect the stock market as a whole, as well as individual stocks. The stock market reacts well to things such as low inflation, increasing Gross National Product (GNP), and other positive news in the economy. The market does not react well to signs that inflation is on the rise or unemployment rising.

TodayЎЇs inflation rate is on the rise due to hurricane Katrina and high gas prices. ÐŽoConsumer prices rose at the fastest pace in more than 25 years last month, spurred by a surge in energy prices to record highs after Hurricane Katrina.ÐŽ±

Hurricane Katrina has also affected unemployment in the U.S. After the hurricane was said and done it cost the U.S. over 500,000 jobs, and the unemployment rate rose from 4.9% to 5.1%. September was the first month since May 2003 in which U.S. payrolls declined. Payrolls however are expected to start growing again soon. However, on a brighter note, economists say that without hurricane KatrinaЎЇs effects, the number of jobs would have been increased by about 200,000 in September, which is the monthly average this year.

Consumer confidence fell to a two year low as well when it fell from 87.5 in September to 85 in October, the lowest it has been since October 2003. While this may be a large decrease, some economists say that it may not matter much because people seem to be borrowing and spending more money no matter how little confidence they have in the economy.

The industrial production (based on output from U.S factories, mines and utilities) of the U.S. has fallen drastically as well after hurricane Katrina. The fall was quite substantial at 1.3%, to the lowest it has been since January of 1982. This drop was because of a decline in oil and gas output after hurricane Katrina.

While industrial production is down, manufacturing has increased substantially with the highest rating in over a year. One reason for this may be because there is sometimes a panic in a Hurricane situation, so people may actually order more than they need to make sure they do in fact get what they need.

Retail sales in the past month have increased 0.2%, which is better than a loss, but below economists expectations. This low increase was mainly due to the drop in auto sales. If you do not take into account the auto sales the retail sales have increased 1.1% which was actually better than the economistЎЇs expectations of 0.8%.

Industry

The food industry is very much a defensive stock, because no matter what people have to eat. While defensive stocks may be hurt in the downtimes they will not experience the wrath of the market as much as a technological company would. It works the same in the opposite way as well; if the economy is doing great we are not going to see people buying huge amounts of cheese or milk.

The threat of new entrants into the market is seemingly small. While there are opportunities to get into the market by specializing in one or a few products, it is very hard for a company to get into the market and compete at the level of Kraft, or Unilever. Some competitors that are out there do however have the ability to expand. There are opportunities for expansion in their own industry, as well as outside of the industry. Proctor and Gamble is a good example of a company that has found a way to successfully combine products in many different industries.

The retail food industry has an industry average P/E ratio of 20.41, while

Kraft has a similar P/E of 17.13. One of KraftЎЇs largest competitors Unilever has a P/E

ratio of 27.86. The lower the P/E ratio the more risky the stock is and compared to the

market. Kraft is above the market average P/E but just below the Industry average. This means that Kraft is less risky than most stocks in the market but compared to the food industry it is slightly riskier.

KraftЎЇs market cap is 47 billion while its top competitor Unilever has a higher market cap at more than 243 billion. Compared to the industry average Kraft has less than half the debt to equity ratio at only 0.37, meaning Kraft does not owe nearly as much as the average retail food company would compared to their equity. KraftЎЇs dividends per share are however less than UnileverЎЇs. Kraft pays out $0.92 per share while Unilever pays $1.24.

Company

Kraft foods would most likely be a prospect for a value investor under the category of a defensive stock. Kraft is not likely to make you a huge profit in a matter of days as a tech company might have. A person who invests in Kraft is one who is willing to wait for a profit, based on the underlying fundamentals of the company, not because they are trying to make a profit off of the lesser fool approach, or make a quick buck. The investor would look to invest when Kraft has been below their expected level, and the investor finds that it is undervalued.

Fundamental Analysis

The Dividend Discount Model is a model used to determine intrinsic value of a stock based on future series of dividends that grow at a constant rate. This model is based on a lot of assumptions. We assumed that KraftЎЇs dividend growth rate will be comparable with its historic growth rate over the past five years. Using the variables in the DDM we calculated that the shareholders required rate of return is 5.27%. The expected growth rate is 3.2%. The fact that Kraft is a defensive stock, earnings are less volatile and provide a steady stream of dividends. Using the DDM/GGM, the present value of future dividends is $28.76.

The equity multiplier model takes the earnings, expected return, growth of the investment and the dividend payout ratio into account to return a price associated with the other variables. KraftЎЇs dividend has been growing recent years. Looking back two years, the dividend per quarter has increased from $.18 in 2003 to the current quarterly dividend of $.23 per share. Earnings per share (EPS) during the same time have actually decreased from $1.96 per share in 2003 to $1.56 per share in 2004. The 2003 number is the newly restated earnings figure.

Examining the data, the dividend increased and the EPS has decreased. This means that the dividend payout ratio actually increased, as more money was being taken out of the company when less money was coming in. The current dividend payout ratio is calculated by taking the dividend, $.23, and dividing it by the current EPS which is estimated to be $1.89