DONALD YACHTMAN
PRESIDENT
THE YACHTMAN FUNDS

COMPANY: Kraft
TICKER: KFT (NYSE)
PRICE: $32.83
52 WEEK RANGE: $27.44-$33.00
MARKET CAPITALIZATION: $54.53

Donald Yachtman is the president and co-chief investment officer of Yachtman Asset Management Company. He is also the president of and a co-manager of the Yachtman Funds. Mr. Yachtman spoke with Katharine Herrup of The New York Sun about why he thinks Kraft Foods Incorporated will make a long-term comeback.

What is Kraft’s history?

Kraft is still heavily owned by Altria, they used to be called Phillip-Morris, but then changed their name after some tobacco issues. Altria wanted to diversify so they bought General Foods and then Kraft.

Why do you like Kraft’s stock?

The stock price peaked in 2002 with a high of $43.90. For three years after its peak, the profit margins went down, and the stock bottomed in 2005. Now Kraft is starting to stabilize. Basically, it’s a high quality company selling at a low price. Kraft is like a cash cow – it’s a slow growth stock, highly profitable, and cheap business.

Why do you think Kraft’s stock will now continue to increase?

The company has gone through a series of cost cuts and refining of products that were less profitable and didn’t fit from a long-term standpoint. Kraft is now focusing on products that are doing well and are adding new ones into areas where they have dominant market share. In the meantime, the company has raised its dividend and started to buy back shares. I think we probably have seen the bottom in profit margin for some time to come.

What does Kraft Incorporated own?

They own Maxwell House coffee, Post cereal, Oscar Meyer, Kraft cheese, and Nabisco crackers and cookies.

What should we expect to see from Kraft?

You will continue to see situations where they sell off product categories or sell off market share – they have sold off Lifesavers and Altoids to Wrigley. They also optioned off Stella D’Ora, a snack business as well, but they bought the South Beach Diet and DiGiorno’s pizza.They have historically done this with a lot of businesses.They shed the businesses they don’t feel like they can make a profitable return on, expand the more profitable ones, and extend the lines that are doing well. Over time, they will make a comeback.

Where do you hope the stock will be in the long-term?

We think you’re going to get close to a 10% return if you hold this over the next 10 years. That may not sound like a lot, but in a market that will provide a 6-7% return this one should provide a double-digit return. In order to get to double-digit returns I would say the stock price would be more than double where it is now. If you risk adjust it, this is the most attractive stock out there.

What’s driving the growth forward?

A combination of improving profitability and unit growth, population growth, and taking more market share in their categories and new products. I think gradually they will also expand nationally and overseas.

Is it a good time to buy?

Yes. When a stock is already at a good value, I do not think it is good to wait to see if the stock will get even lower.

What are the risks?

It’s a very low risk even though the return is somewhat low. I think in the case of Kraft the long-term return will be higher than most high risk stocks.