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Our Take on Kraft Foods

Kraft may take a while to live up to its full potential.

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Kraft Food's (KFT) $8.4 billion IPO has received quite a bit of attention, and with good reason. For the first time in more than a decade, investors are able to buy a piece of America's largest food company without all the legal and moral baggage that comes with tobacco giant (and Kraft parent) Philip Morris (MO)--or, at least, with less baggage than before. Once all the hype is stripped away, Kraft looks to us like a solid and attractive company, but one with some shadows over it that potential investors should be aware of.

On the plus side, the size and breadth of Kraft's product lines give it a definite advantage in the rapidly consolidating food industry. It makes everything from Oscar Mayer hot dogs to Jell-O to Maxwell House coffee--last year it had 61 different brands that brought in at least $100 million in revenue apiece, and its products are used in more than 99% of U.S. households. Such scale has allowed Kraft to generate healthy profits, as its operating margin grew from 11.7% in 1996 to 15.1% in 2000. Such fellow food giants as Nestle (NSRGY) and Sara Lee (SLE) have operating margins in the 11% to 12% range, indicating that Kraft has done a better job than its peers of wringing efficiency out of each dollar of revenue.

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David Kathman does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.