The Zacks Analyst Blog Highlights: Kraft Foods, SodaStream International, Netflix, Amazon.com and Verizon Communications

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Jul 23, 2012, 09:30 ET

CHICAGO, July 23, 2012 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include Kraft Foods, Inc. (Nasdaq:KFT), SodaStream International, Ltd. (Nasdaq:SODA), Netflix Inc. (Nasdaq:NFLX), Amazon.com Inc. (Nasdaq:AMZN) and Verizon Communications (NYSE:VZ).

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Here are highlights from Friday's Analyst Blog:

Kraft Expands Soda Stream Deal

Kraft Foods, Inc. (Nasdaq:KFT) has expanded its existing partnership with SodaStream International, Ltd. (Nasdaq:SODA) to use its powdered beverage Kool-Aid with the latter's soda making machines. The partnership involves the manufacturing, marketing, distribution and sale of Kraft Foods' beverages like several varieties of Crystal Light, and Country Time, a lemonade brand, for use with SodaStream's soda making machines.

Kool-Aid will be offered in Cherry, Grape and Tropical Punch flavors and will be available in the U.S from the fourth quarter of 2012.

The partnership with Sodastream will help both the companies reach out more extensively to the growing number of health conscious consumers. Soda making systems offer a healthier way to enjoy carbonated beverages at home for these consumers.

At the moment, Kraft Foods is in the process of being divided into two independent public companies: a global snacks company and a North American grocery company. 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 U.S. Beverages, Cheese, Convenient Meals, Food Service and, Grocery segments as well as the non-snack categories in Canada. The transaction is expected to be completed before the end of 2012.

We currently have a Neutral recommendation on both Kraft Foods, Inc. and SodaStream International, Ltd. The stock of Kraft Foods, Inc. carries a Zacks #4 Rank (a short-term 'Sell' rating) and the stock of SodaStream International, Ltd. carries a Zacks #3 Rank (a short-term 'Hold' rating).

We appreciate Kraft Foods' diverse brand portfolio and significant exposure to the fast growing markets. Moreover, continued strong momentum from the core brands (Power Brands) adds value. 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 slow economic recovery.

Headquartered in Northfield, IL, Kraft Foods Inc. is one of the largest branded food and beverage companies in the U.S. and the second largest in the world. Kraft's products include six consumer sectors: biscuits, confectionery, beverages, cheese, grocery and convenient meals. The company sells its products in approximately 170 countries.

Earnings Preview: Netflix

Netflix Inc. (Nasdaq:NFLX) is scheduled to announce its fiscal second quarter 2012 results after the closing bell on July 24, 2012. In the run up to the earnings release we do not notice any significant estimate revision by the analysts. We note that Netflix has outperformed the Zacks Consensus Estimate in the preceding four quarters by a positive 34.95%. We expect this trend to continue in the current quarter.

Previous Quarter Highlights

Netflix reported first quarter 2012 loss per share of 8 cents, which not only outpaced the Zacks Consensus Estimate of a loss of 28 cents, but was also significantly above management's guided range of a loss of 49 cents to a loss of 16 cents per share. However, when compared on a year-over-year basis, Netflix's loss per share had plummeted from earnings per share (EPS) of $1.11.

Total revenue increased 21.0% year over year to $869.8 million, ahead of the Zacks Consensus Estimate of $867.0 million. The year-on-year revenue growth was primarily boosted by newer additions in the total subscriber base.

For further details please read: Netflix Surpasses Estimates

Estimate Revision Trend

In the last 30 days, one out of the 27 analysts covering the stock revised their estimates downward, while no upward revision was noticed. However, the Zacks Consensus Estimate for the second quarter 2012 remained at 4 cents, within management's the guided range of (10 cents) to 14 cents.

For the second quarter, the revenue estimate as per the Zacks Consensus is $889.0 million, which lies within management's guided range of $873.0 million to $895.0 million.

Analysts expect the company to report decent quarter driven by higher subscription growth. The company has been adding content for its streaming business to make its offering more diverse. However, the new licensing agreements would put pressure on the company's cash flow. Moreover, investments made to expand into the international regions might contract margins.

Recommendation

We believe Netflix's offering of new and exclusive contents is the biggest USP compared to some of its closest peers. Apart from recent movies and documentaries, Netflix is also boosting its original content portfolio to entice new subscribers in the US and international markets.

However, higher capital expenditure due to international expansion will hurt earnings growth in the near term, in our view. Moreover, when compared to some of its cable and communications peers that have diversified revenue and cash flow streams, Netflix relies solely on streaming for future growth, as its DVD rental business continues to lose subscribers. We believe that the streaming market is getting overcrowded with bellwethers such as Amazon.com Inc. (Nasdaq:AMZN) and Verizon Communications (NYSE:VZ). This may hurt Netflix's margins going forward. We provide a word of caution to investors in this respect.

We have a Neutral recommendation on Netflix over the long term. Currently, Netflix has a Zacks #3 Rank, which implies a Hold rating in the short term.

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