Last week, international food giant Kraft Foods (NYSE:KFT) reported quarterly results that corroborated with what many of us have been saying all along: consumers are adopting a more cost-conscientious lifestyle characterized by fewer nights dining out and more nights eating in.
Considering the subtle reaction in Kraft shares after the earnings report, investors didn't seem all that impressed that EPS from continuing operations in the 2009 second quarter were up 27% to 56 cents. To top it off, Kraft even revised full year guidance upward to "at least" $1.93 a share.

IN PICTURES: World's Greatest Investors

Relatively Speaking
I'm not one to bank on expectations, but I'm willing to take Kraft's word that it will continue to sell its products to frugal consumers. And the company is successfully executing its three year turnaround plan - despite the 5.9% decline in revenues, operating income was up almost 8%.

On a relative basis, Kraft seems to offer the best value among major food companies. And Kraft's collection of brands - Digorno Pizza, Oreo cookies, Maxwell House Coffee and, of course, cheese - are some of the most recognizable and consumed products in the world. Yet Kraft trades at a P/E of 14 versus 15 for Kellogg (NYSE:K) and General Mills (NYSE:GIS), respectively. Even, Pepsico (NYSE:PEP), which has a sizeable food business, commands over 18 times earnings.

A Primer on Stock Valuation
If the above discrepancies don't seem meaningful, consider one that does: a dividend yield that is 30% higher than any of the above named businesses. This yield difference is substantial if you understand how stocks are valued.

Stocks are valued based the present value of the expected future cash flows. Only two options are available with those cash flows: reinvestment in the business or dividend distribution. Since the majority of those cash flows will occur years from now and not today, it stands to reason that the greatest value from holding stocks occurs after years of ownership. (For more, check out Stock-Picking Strategies: Value Investing.)

Kraft's Dividends
With Kraft, investors earn over 4% a year just from dividends. The company believes that earnings can grow by 7% to 10% over the next few years. If we assume that the stock price rises by the same 7% to 10%, then owners of Kraft can expect to earn 11% to 15% a year from the stock. The market rally of the past few months may have fooled investors into thinking that 30% to 40% annual returns are within reach for the masses.

Bottom Line
I think that in five years from now, if you have earned 11% to 15% a year, your performance will likely be better than most - and that includes professionals. One professional in particular, Warren Buffett, happens to be a very large shareholder in Kraft. If the stock is good enough for Berkshire Hathaway (NYSE:BRK-A, BRK-B), it's good enough for most. (For further reading, check out Warren Buffett: The Road To Riches and Think Like Warrent Buffett)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Options & Futures

    What Does Quadruple Witching Mean?

    In a financial context, quadruple witching refers to the day on which contracts for stock index futures, index options, and single stock futures expire.
  2. Economics

    How Warren Buffet Made Berkshire Hathaway A Winner

    Berkshire Fine Spinning Associated and Hathaway Manufacturing Company merged in 1955 to form Berkshire Hathaway.
  3. Options & Futures

    4 Equity Derivatives And How They Work

    Equity derivatives offer retail investors opportunities to benefit from an underlying security without owning the security itself.
  4. Investing News

    What Does the Fire Monkey Mean for Your Portfolio?

    The Chinese new year this year corresponds to the monkey, a quick-witted, playful, tricky figure that means well but has a penchant for causing trouble.
  5. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  6. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  7. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  8. Retirement

    Warren Buffett's Investment Lessons for Retirees

    For those in retirement, Warren Buffett's clear, timeless advice on investing is worth a look.
  9. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  10. Options & Futures

    Five Advantages of Futures Over Options

    Futures have a number of advantages over options such as fixed upfront trading costs, lack of time decay and liquidity.
RELATED FAQS
  1. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  2. What is after-hours trading? Am I able to trade at this time?

    After-hours trading (AHT) refers to the buying and selling of securities on major exchanges outside of specified regular ... Read Full Answer >>
  3. How do hedge funds use equity options?

    With the growth in the size and number of hedge funds over the past decade, the interest in how these funds go about generating ... Read Full Answer >>
  4. Can mutual funds invest in options and futures? (RYMBX, GATEX)

    Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
  5. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  6. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center