Kraft Foods Looks Delectable
Kraft Foods, Inc. (KFT) completed its Sustainable Growth Plan, which included capacity rationalization, stock keeping unit reduction, and cost savings programs; however, the results were unsatisfactory. Therefore, in February 2007, the management announced a new turnaround strategy to revitalize the company's growth.
Concurrent with the announcement, the Board approved a significant $5 billion share repurchase program. The new strategy has generated a significant turnaround in organic revenue growth. In mid-February this year, Berkshire Hathaway (BRK.A) disclosed the ownership of a substantial stake in Kraft Foods. The Buy recommendation is maintained.
Since the stock offering in 2001, Kraft's stock has traded between a 13 to 22 P/E multiple. With the turnaround in organic revenue growth and positive earnings comparisons expected to begin with the fourth quarter of 2008, the stock appears attractive. The target price of $36.50 is based on a 19 P/E on this year's earning estimate of $1.92.
Shanghai Petrochem Nears Ceiling
Shanghai Petrochemical's (SHI) exposure to the fast-expanding Chinese economy and strong petrochemical product demand make us confident of strong volume growth. However, revocation of government price controls in the future, higher crude oil prices and increased competition are some of the major concerns for the company.
As expected, the company's first half 2008 net profit declined by more than 50% from the year-ago period. The company expects profits to fall further in the second half of the year. Thus, we rate the stock a Hold with a six-month target price of $33.
On August 27, Shanghai Petrochemical reported first-half 2008 results. In the first six months of 2008, the company recorded a net loss of $47.72 million, compared to a profit of $230 million in the prior-year period. The company reported diluted loss per ADS of $0.01 in the first half of 2008.
Substantial increase in international crude oil prices has affected earnings. For the same period, the company reported an operating loss of $264 million. For the six-month period ended June 30, SHI's turnover was $4.2 billion, up 22.55% year over year.
'
By 2010, SHI is expected to have 16 million tons of crude oil processing capacity and 1.60 million tons of production capacity of ethylene, 0.95 million tons of synthetic resin and plastics and 1.40 million tons of chemical fiber raw material and synthetic fiber, enabling a strong foothold in international markets.
As a part of its growth strategy, the company entered into a joint venture with Kuwait's national oil company, Kuwait Petroleum Company, to build an oil refinery with oil processing capacity of 300,000 barrels per day. The project is estimated at $5.5 billion.
Norfolk Southern Target Higher
We are maintaining our Hold rating on Norfolk Southern Corp. (NSC), but raising our target price to $70. In its second quarter report, NSC posted EPS of $1.18, well above the consensus and Zacks estimate of $1.05, largely due to better-than-expected revenue growth.
Revenues rose 16% due to a 14% gain in revenue yield, partly offset by a 2% volume decline. We are increasing our diluted EPS estimates to $4.30 from $4.05 for 2008 and to $4.90 from $4.60 for 2009. We expect results to benefit from continued strong pricing, though volumes should decrease due to economic weakness. Fuel costs will likely prove a significant headwind.
