Kraft Squeezable

Kraft's earnings are out and they got quite the margin squeeze.

The sales were up significantly, 10.9%, and there were about 6% shares due to a share buy back, but that translated into zero growth in earnings for 4th quarter and a decline of 12.4% for 2007.

Kraft's margin declined by 4.1%. Nine out of the eleven largest commodity input costs are at record high levels. Kraft priced their products based on historical prices and therefore did not respond to the dramatically increasing input costs.

I might add that many investors are doing the same with how they are pricing their investments and how much they expect them to grow based on a historical prices, ignoring that input costs across the market are dramatically increasing and companies only have so many "tricks" to try and smooth them over.

An example of prices input increases for Kraft would be barrel cheese. It increases from $1.31 last January to $2.03 in November, or 54% at the peak. It is unlikely that kind of price increase can be passed on to consumers without losing a big chunk of market share. Perhaps this last round Kraft did not increase their price as much as the competition and that accounts for the increased market share.

A further potential problem for Kraft is that they have as much debt as 5 years ago because of the share buyback program. So in future quarters they should also have more interest expense.

Yuck... Kraft has one of those tax things where after taxes are "paid" earnings increase... When tax benefits are used up the "earnings" takes a major hit and the stock tends to trade down to reflect true earnings.

World grain stores have declined from 110 days around 2000 to 53 days currently so it is no surprise that wheat is at an all time high. Additionally, with the weakening US dollar any imports would be up considerably.

Other commodities coming from developing countries are likely to reprice to a more fair value for the workers. The prices were suppressed due to UN policies where they were all pushed into agriculture to help pay back the debt and it resulted in some commodities being priced at 30c on the dollar compared to 20 years earlier. It also resulted in worsening the poverty, yet North America gained with cheap imports. There has been an increase in replanting those highly suppressed crops with drugs and other cash crops, which is finally pushing the prices up to more reasonable levels.

The prices are likely to stay significantly higher.

So, Kraft raises prices to increase profitability, and they lose market share, or they remain the same and they just aren't as profitable.