Breaking Up Kraft (KFT)?

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Kraft (KFT) may sell its Post cereals operation. The Wall Street Journal thinks the unit could be worth $3 billion. That really isn’t very much. The snacks and cereals division at the company did $1.6 billion in the June quarter and $266 million in operating profit. Since the entire company trades at 1.4 times sales, selling Post for $3 billion may not make sense.

But, Kraft has a bigger problem than Post, which is why raider Nelson Peltz would like to see the company do a huge share buy-back, even if it has to raise money to do so.

In the last quarter, operating income at four of the company’s seven divisions dropped. Only the EU unit of the company and and the developing markets segment had large increases.

In other words, Kraft’s sales and operating income are showing almost no growth in the US, which is about two-third of its base.

Peltz may be right, and Kraft could take on boat loads of additional debt. It already has $7 billion on the balance sheet, but its operating income this year should be close to $4 billion. It is not hard to see the company moving its debt load up to $20 billion.

Kraft has a market cap of $50 billion. Why not buy-in 25% of its outstanding?

Douglas A. McIntyre