Credit Suisse Remains Skeptical About Kraft Foods Group Inc (KRFT) Stock

Credit Suisse came up with a report on the stock of Kraft Foods Group Inc (NASDAQ:KRFT) today, in which the firm justified why it has maintained its Neutral outlook for the stock and the $85 target price for it. The target price indicates a return of just 0.6% from the stock’s closing price for yesterday. The stock is trading lower in pre-market trade today, following the release of report by the firm. The stock trades at a price of $84.31, marking a fall of 0.24% from yesterday’s closing price.

The major highlight of the firm’s report was skepticism about revenue growth for the producer of packaged foods and beverages company. The firm states that investors holding position in the stock, and eyeing growth, should be cautious. The firm believes that the merger between Kraft and Heinz is wrongly promoted by the management to bring growth. Credit Suisse is of the opinion that the merger might result in margin expansion but not in growth. The notion is supported by the analysis of similar companies over the past three years, revealing that the sales growth for these companies has been difficult especially in the developed markets.

The firm also has little trust in the management of the new company bringing about any growth. The board has set such executive compensation plan that does not make the management move towards growth objectives. If the compensation plans are not changed, and the new management does not bring about any major policy changes, then the growth is unlikely to take place.

The outlook for Kraft Foods’ coming periods by the firm remains pessimistic. It however targets growth slightly higher than the past average for the company. By its calculations, the pro forma growth rate over the past four years for the company has been 1.7%, while the growth estimated for the year is 2%. The firm weighs in little value addition from the international expansion measures taken by the company, until the management comes up with a clear plan on how it plans to do things differently.

The stock currently trades at a premium of 7% to other peers in the staples sector. While investors may seem this as justified, the firm believes that its slow organic growth and the wide exposure to developed markets, makes it a potential candidate to move into the group of low growth companies that are currently trading at a 9% discount. The firm also mentions that it could be wrong with it’s judgment, as it might be too conservative in the investors willingness to pay for the cost cutting potential from the merger. Investors might overlook the growth potential, something that has been a centre of focus for the thesis presented by Credit Suisse.

How The Overall Street Looks At The Stock
The majority of street analysts that cover the stock have a Neutral outlook for the stock. Nine of the 20 Bloomberg listed analysts covering Kraft Foods stock, rate it as a Hold, seven rate it as a Buy, and four rate it as a Sell.

The consensus twelve month forward target price for the stock stands at a value of $90.46, indicating a potential return of 7% from holding the stock.

The highest target price for the stock of $96 is provided by Alicia Forry of Canaccord Genuity Corp, while the $85 target price from Robert Moskow of Credit Suisse has been the lowest of all.

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