Kraft (KFT) reported excellent third-quarter results Wednesday that showed significant pricing expansion. The firm raised its outlook for 2011, and we are maintaining our above-market fair value estimate.
The firm’s top-line advanced 11.5% led almost exclusively by organic expansion, which was 8.4% in the quarter. We loved that 7 percentage points of the growth was pricing, which signals to us the strength of Kraft’s competitive advantages and pricing power. Volume and mix contributed the balance of the growth. The company noted that momentum is accelerating in North America, that operating results in Europe remain strong, and that it is seeing double-digit growth in developing markets—all positive news.
Kraft’s adjusted operating income jumped over 12% thanks to pricing growth, productivity enhancements, and favorable foreign currency. The firm’s adjusted operating margin edged up 10 basis points. We think Kraft’s pricing power and ability to hold the line with margins in the face of higher commodity costs is among the best among peers. While we liked operating performance, we were blown away at the company’s bottom-line expansion. Earnings per share jumped a whopping 23.4%, to $0.58 in the quarter (above consensus estimates).
Looking ahead, Kraft raised its organic revenue guidance for 2011 to at least 6% from 5% previously and increased its earnings-per-share outlook for this year to at least $2.27 from $2.25 previously. The company’s decision to split the firm into two remains on plan (read our second-quarter note for more detail on this development). We are strongly considering adding the firm to our Best Ideas portfolio on the basis of its pricing power and undervaluation.