Is Kraft Expensive or Undervalued?

With shares of Kraft Foods Group (NASDAQ:KRFT) trading at around $54.51, is KRFT an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let's analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock's Movement

Many investors are staying away from Kraft because it only has domestic operations, which leads to limited growth potential. However, Kraft shouldn't be looked at as a growth play. This is a company that should be able to deliver consistent profits and return capital to shareholders through dividends and share buybacks. Currently, Kraft yields an impressive 3.70 percent. This is higher than the 3.00 yield for ConAgra Foods (NYSE:CAG) and the 1.40 percent yield for Hillshire Brands Company (NYSE:HSH).

As far as growth for Kraft, it has an expected five-year growth rate of 6 percent, which is below the industry average of 7 percent. Kraft has increased its advertising and brand building efforts. This has the potential to help the top line, but even employees have been frustrated by the company's lack of investment in new brands.

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Kraft delivered a strong Q1. Gross profit increased 3.7 percent year-over-year, operating profit increased 9.2 percent year-over-year. Organic revenue for the Cheese segment increased 5.5 percent. However, organic revenue for the Grocery segment declined 0.4 percent. Overall, revenue increased 2.10 percent year-over-year, and earnings declined 5.60 percent year-over-year. These numbers can be a bit misleading considering the direction of the company. While there is some innovation, cost-cutting has been a major focus, which has made this a leaner and more profit-focused company.

Many investors would like to know as much information as possible about Kraft since it has ventured out on its own. One good way to find out what's going on at the company is to take a peek inside. In other words, what do employees feel about the company? According to Glassdoor.com, employees have rated their employer a 3.4 of 5, and 68 percent of employees would recommend the company to a friend. These numbers indicate a slightly above average company culture. In regards to leadership, 89 percent of employees approve of CEO Tony Vernon. This is a high number, which is a good sign.

On the negative side, Berkshire has reduced its stake in Kraft by 4.0 percent and competition has increased. A 4.0 percent decline in Berkshire's stake isn't major and shouldn't be cause for any alarm. As far as competition goes, this should be expected. Therefore, these aren’t major negatives.

Sticking with the competition theme, Kraft is trading at 20 times earnings whereas ConAgra is trading at 28 times earnings and Hillshire Brands is trading at 5 times earnings. Many investors feel that Kraft is expensive here. However, the industry a is trading at 24 times earnings.

Let's take a look at some important numbers prior to forming an opinion on this stock.

T = Technicals Are Still Mixed

Kraft has performed well since the spinoff, but the past month has been subpar.

	1 Month	Year-To-Date	1 Year	3 Year
KRFT	-1.29%	21.06%	0.00%	0.00%
CAG	-2.90%	16.45%	38.04%	49.80%
HSH	-3.32%	21.37%	-19.91%	20.60%

At $54.51, Kraft is still trading above its averages.

50-Day SMA	54.16
200-Day SMA	49.46

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E = Equity to Debt Ratio Is Weak

The debt-to-equity ratio for Kraft is weaker than the industry average of 0.80. This is one of the few negatives for Kraft.

	Debt-To-Equity	Cash	Long-Term Debt
KRFT	2.66	1.18B	9.97B
CAG	2.07	723.80M	10.68B
HSH	2.25	416.00M	949.00M

E = Earnings Have Been Steady

Only the quarterly numbers are listed below since they better reflect Kraft’s potential as its own company.

Quarter	Mar. 31, 2012	Sep. 30, 2012	Dec. 31, 2012	Mar. 31, 2013
Revenue ($) in millions	4,453	4,606	4,494	4,546
Diluted EPS ($)	0.82	0.79	0.15	0.76

Now let's take a look at the next page for the Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

Conclusion

Kraft might not be a great growth play, but it's still capable of growth. Even though product innovation hasn't been overly impressive, Kraft is exceptional at marketing. Therefore, it should be able to increase exposure for existing brands. It should also be noted that most Kraft consumers are loyal to the brand, which helps establish a solid base for revenue.