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Tickers in this Article: KFT, PG, K, CAG, CBY
Kraft Foods (NYSE:KFT) third quarter earnings followed a somewhat similar pattern to that of Procter and Gamble (NYSE:PG) and Kellogg (NYSE:K), which were announced a week prior. Kraft reported profits of 55 cents a share, compared to 91 cents per share a year earlier. Sales were down by 6%, mainly as a result of a stronger dollar affecting Kraft's overseas profits.

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Brighter Days Ahead
Similar to P&G and Kellogg, Kraft exceeded analysts expectations, which were estimating 48 cents a share. If anything, this surprise should reiterate the notion that analysts don't often get right, especially when markets are at extremes, with estimates coming in low during weak times and high during periods of optimism. Analysts, after all, are humans as well. Kraft also increased its full year guidance to nearly $2 a share.

That forecast would imply that Kraft, currently trading near $27, is trading for about 13.5-times this years profits. For a business of this quality, that's a very attractive price. The price becomes even more attractive when you consider the ultra-juicy 4.2% dividend yield. Fellow competitor ConAgra Foods (NYSE:CAG) also trades for a similar valuation, along with a 3.8% yield. But ConAgra is valued at nearly twice book value against 1.6 for Kraft.

In addition, Kraft is still very interested in candy company Cadbury (NYSE:CBY) and the company has recently obtained a loan for $9 billion to support its $17 billion bid for Cadbury. While the deal is far from sealed, my gut feeling is that it will find a way to work. The synergies between the businesses is too compelling: Kraft would gain an immediate presence in instant purchase locations like convenience stores and get strong exposure to the Latin American markets, which Kraft currently doesn't have. The 60/40 equity cash component may need to be adjusted, however. Assuming debt terms were favorable, I'd favor an adjustment as Kraft shares are significantly undervalued.

The Bottom Line
Kraft is a quality business that continues to prove it will survive and thrive during this recession. With or without Cadbury, Kraft continues to successfully execute on its turnaround plan. (For related reading, check out A Guide To Consumer Staples.)

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