Kraft’s costs creep higher

Kraft Foods will announce its fourth-quarter figures on Thursday 12 February, and rising costs are beginning to concern traders.

Grocery shopping
Source: Bloomberg

The year 2015 has seen Kraft’s share price soar to a record high despite greater costs which have eaten into the company’s profits. Kraft is being squeezed at both ends as costs are rising for more than half of its products, and at the same time the company has been offering discounts to entice financially savvy customers.

In the recent quarter, gross margin dropped to 29.3% compared with 33.8% in the same period the year before. Higher soft commodity prices have been a problem for Kraft over a number of years, and last summer the company raised the price of coffee for the first time in three years. The cheese business accounts for over one-fifth of the group revenue and also passed on higher input costs to its customers.

Tony Vernon stepped down as CEO in December, and was replaced by John Cahill who was previously the chairman. Since Mr Vernon announced his retirement plans in mid-December the share price rallied 12%, and it recently hit a new all-time high. John Cahill is keen to break into expanding overseas markets while Mr Vernon was too content to focus on North America. The market has welcomed the change in leadership.

Kraft Foods will report its fourth-quarter numbers on Thursday 12 February, and the consensus is for revenue of $4.6 billion and earnings per share of $0.73. The third-quarter figures were well received by traders as revenue came in at $4.4 billion and EPS was $0.77, while dealers were anticipating $4.47 billion and $0.74 respectively. The company will announce its full-year figures on the same date, and dealers are expecting revenue of $18.13 billion and EPS of $3.12. These forecasts equate to a 0.4% drop in revenue and a 19% rise in EPS.

Equity analysts are bullish on the stock and out of the 20 recommendations, eight are buys, nine are holds, and three are sells. The average target price is $64.29, which is 3.8% below the current price. Investment banks are very bullish on Mondelez International —out of the 25 ratings, 16 are buys, eight are holds, and one is a sell. The average target price is $41, which is 14% above the current price.

The number of clients taking short positions on Kraft has increased by 30% since the company revealed its third-quarter numbers, and the short interest in the company is at its highest level in one year.

Since breaking through the previous resistance level of $60 in November the stock has been rising steadily. The $70 mark is the target, and any moves lower will find immediate support at the 200-hour moving average of $65. 

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