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Kraft Foods Recalls Peanuts

Kraft Foods Group, Inc. (MDLZ) recently announced that it is voluntarily recalling single code date of its Planters Cocktail Peanuts as it believes that the product might have been exposed to water not suitable for consumption during the production process. The company had sold around 3,000 cases of the recalled product to its retailers in the US and Puerto Rico. Kraft warns the consumers not to consume the product of the affected code date and return the same to the store from where it was purchased. However, there has been no complaints made with respect to the product and thus we believe the recall will not have any material impact on the company’s earnings.

Kraft Foods is in the process of separating into two independent public companies: a high-growth global snacks business and a high-margin North American grocery business. Global snacks will consist of the current Kraft Foods Europe and Developing Markets units as well as the North American snacks and confectionery businesses. The North American grocery business would consist of the current US Beverages, Cheese, Convenient Meals and Grocery segments and the non-snack categories in Canada and Food Service. The spin-off is expected to be completed before the end of this year.

Following the spin-off, the North American grocery business, which includes popular brands like Oscar Mayer meat and Kraft cheese, will be an independent, public company and will be called Kraft Foods Group. This unit contributed revenues of $18.7 billion in 2011. Additionally, the North American grocery business will consist of more than 20 brands with annual net revenues of between $100 million and $1 billion each.

Last month, Kraft Foods announced that it will name the Global Snacks unit as Mondelez International, Inc. The board of directors has already approved the new name and it will be submitted for shareholder approval at the annual meeting to be held in May 2012. Once the name is approved, the snack company will trade under the symbol of “MDLZ”.

Our Recommendation

We currently have a Neutral recommendation on Kraft Foods. The stock carries a Zacks #3 Rank (a short-term ‘Hold’ rating).

Overall, we are encouraged by Kraft’s strategy of continued cost management, price increases, expansion into emerging markets and continued strong momentum from its designated Power Brands. Further, the split of its North American business is expected to allow Kraft to focus on its distinct strategic priorities and allocate resources optimally. However, we remain concerned about rising input costs and vulnerability to currency translations.

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