Counting on Consumers

About Kraft: Our analysis shows that Kraft is the market leader in categories representing 81 percent of sales in the U.S., versus just 47 percent for its peers, and this will rise further after the divestment of the Post Cereals business to Ralcorp Holdings in mid-2008. Over time, Kraft's dominance should win out and enable the company to see significant margin recovery. We rate Kraft outperform with a target price of $42.

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Jon Andersen, CFAWilliam Blair & [email protected]

Coverage: Branded Consumer Products

About Alberto Culver (ACV): Our Outperform rating on has been (and continues to be) based — in part — on our belief the company should prove to be a pillar of relative strength in a potentially more challenging macroeconomic environment. Alberto-Culver reported fiscal first-quarter results that handily exceeded our (and consensus) expectations on both the top and bottom line, lending additional credence to this view.

First-quarter revenue increased by 14 percent to $401 million (above our $383 million estimate), of which approximately 8 percent was organic, 1 percent was related to a change in accounting for inter-company sales (following the spin-off of Sally Beauty), and the remainder due to favorable currency translation.

Operating income increased by more than 50 percent, as operating margin expansion accelerated on favorable product mix shift, restructuring cost savings, and — to a lesser extent — an apparent timing-related shift in marketing spending to subsequent quarters.

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Christopher GroweStifel [email protected]

Coverage: Food

About Kellogg (K): We are initiating coverage of Kellogg with a Buy rating and $58/share target price. As we reconsider the prospects for Kellogg's business driven by its volume-to-value (V2V) strategy and aggressive marketing/new product efforts, we believe the revelation of improved growth once again in 2008 will continue to drive this stock higher.

Kellogg has managed the input costs with ease by raising prices, generating cost savings and managing its expenses conservatively to blunt the effect of the rampant inflation. So, here we are once again in 2008, considering 9 percent EPS growth but with significant headwinds behind input costs, marketing, and tax rate.

While all food stocks tend to perform well in the face of challenging economic times, Kellogg would likely be a first stop for investors seeking defensive consumer staples stocks. We put Kellogg on the same pedestal as companies such as PepsiCo, Coca-Cola, and Procter & Gamble – consistent, fast growing, "average" valuation multiple, and leading market share.

The company has been the epitome of consistency, which is magnified by the above-plan growth seemingly each and every quarter and the breadth of growth occurring across nearly every major division. So, while there are cyclical tendencies among some of our food companies, Kellogg has been the antithesis of this, and we believe will see some multiple appreciation occurring alongside the malaise currently in the market and the economy.