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Trends That Give Kraft Foods Group Inc (KRFT) a Buy Rating

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Kraft Foods Group Inc (NASDAQ:KRFT)The improving employment data supports the view that the U.S. economy is gradually coming out of the economic crises. This will eventually result in increased consumption, contributing heavily towards higher consumer spending on food items both at home and away.

As disposable income levels increase, I believe investors will witness growth in all food categories, particularly in refrigerated meals. Nonetheless, it must be noted, the overall consumption level at present is far below the pre-recession levels, thereby, whether it can catch up and exceed those levels will primarily depend on the growth rate posted by the U.S. economy in the coming years.

The refrigerated meals division of Kraft Foods Group Inc (NASDAQ:KRFT) offers packaged dinners, lunch combinations and processed meats. This particular division generated $3.3 billion in revenues during 2012 with an EBITDA margin around 15%. According to the research offered by Trefis, Kraft Foods Group Inc (NASDAQ:KRFT)’s revenue through this division is estimated to grow at an average annual rate of 5% to 6%, predominantly due to noticeable change in consumer preferences, an improving macroeconomic environment and higher prices.

Growing demand for refrigerated meals

The economic recession during 2008 led to a massive slowdown in the growth of dollars spent on food away from home. The consumers were forced by the turbulent economic environment into reducing their food bills, which eventually resulted in consumers refraining from eating away from home.

According to the a recent research published by the Economic Research Service department of the USDA, there has been a considerable reduction in growth of consumer spending on food away from home during the last four years. However, in stark contrast the growth in money spent on home food items only exhibited a marginal slowdown.

Refrigerated meals offer a high level of flexibility to consumers in addition to low food bills. Over the last few years consumers have exhibited a clear inclination towards refrigerated meals as an easy cost cutting solution. Therefore, the market for such products has escalated rapidly in recent times, which, allows me to hold a bullish view on Kraft Foods Group Inc (NASDAQ:KRFT)’ stock price.

Changing preferences

There is a noticeable change in trend in the U.S. food market with an increased consumption of vegetarian food. This was established by  Datamonitor, which states that vegetarian items accounted for 5.4% of all new products launched during 2011, which is a significant increase from 4% during 2006.

At present, the consumer base for vegetarian products is relatively small, nevertheless, the vegetarian market is expected to grow at an exponential pace in the future, as consumers turn more health conscious.

Kraft Foods Group Inc (NASDAQ:KRFT) vegetarian products, which are offered through the Boca Foods are fast growing in popularity, especially among consumers that are more inclined towards healthier eating options. Going forward, if the trend continues, Kraft Foods Group Inc (NASDAQ:KRFT) vegetarian products should turn into a main revenue driver for the company.

Potential threats

According to the data published by the Bureau of Labor Statistics, the prices of milk, beef and chicken have consistently increased at a rate of 4% to 6% during the last three years.

In addition, sluggish agricultural production of corn, soybean and other crops have resulted in higher commodity costs. The sharp rise in commodity prices coupled with drought type conditions during 2012 made things go from bad to worse in the U.S. Commodity costs in the near term are expected to remain on the higher side, which may lead to an increase in selling prices.

Another challenge for Kraft Foods Group Inc (NASDAQ:KRFT) is the growing negative perception of refrigerated and frozen foods. They are considered to contain low nutritional value and harmful preservatives. It is essential for the entire industry to change the growing perception among consumers through investing in marketing and educating the customers on the benefits associated with healthy vegetarian meals.

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