Kraft's cheesy math

NEW YORK (Fortune) -- In the strange but true department, a recent securities filing by Kraft Foods seems to stretch the value stock investors are willing to place on the company.

A proxy statement filed with regulators last month presents a statement of Kraft's (KFT, Fortune 500) financials as of the end of the third quarter. Near the bottom of that table, on page 16, the company lists its period-end price-to-earnings ratio as 17.

That calculation reflects the Northfield, Ill., company's Sept. 30 closing stock price, $26.27, divided by its per-share earnings, $1.56, for the first nine months of the year.

But wait -- aren't P/E ratios usually calculated using annual earnings, or the equivalent, for the purpose of comparing the stock price to the company's annual profitability?

Indeed they are. And because Kraft made 43 cents a share in last year's fourth quarter (this year's numbers haven't yet been reported), the company's earnings for the last 12 months are $1.99 a share.

That puts Kraft's P/E at a more pedestrian 13 -- which is below its level of previous years (see chart above) and below the multiple of the S&P 500 index of big companies.

Investor discontent over Kraft's slow growth is no secret. Indeed, CEO Irene Rosenfeld alluded to those concerns in September, when the company launched a $17 billion bid for U.K. candy maker Cadbury (CBY).

"This proposed combination is about growth," Rosenfeld said.

But Kraft's slow growth isn't the only thing chafing some investors. Warren Buffett, the CEO of Berkshire Hathaway (BRKA, Fortune 500), released a letter this week objecting to Kraft's plans to issue hundreds of millions of new shares in the deal.

Buffett, whose firm owns 9.4% of Kraft (purchased mostly at higher prices than prevail now) and is the company's biggest shareholder, said he views Kraft shares as undervalued and thus unsuitable for heavy issuance in a merger.

Oddly, Kraft seemed to concur. The company announced plans this week to sell its frozen pizza business to Nestle in order to raise cash that will be used instead of stock should the Cadbury deal come to fruition.

That move surprised some analysts.

"While a divestiture is not a complete shock, we admit to being caught off guard by the nature of this specific transaction," Stifel Nicolaus analyst Christopher Growe wrote in a note to clients this week. "The frozen pizza business was widely regarded as a key growth pillar for Kraft, one of the company's fastest growing businesses in our view and thus likely not the first choice for sale."

What's more, Kraft called its stock "undervalued" in a press statement and added that "its share price is depressed as a consequence of a number of short term factors which it believes will dissipate once the uncertainty surrounding its Offer for Cadbury is resolved."

Though it seems clear Kraft has been feeling pressure on its valuation, the company says the calculations in its filings weren't tweaked for the sake of presenting a rosier picture.

"It is simply a nine-month number, like all the other numbers presented for 2009," said Kraft spokesman Mike Mitchell. "There's no sense of manipulation."

The strange P/E calculation comes in a proxy filing that was mailed last month to shareholders who will soon vote on plans tied to the Cadbury bid.

Misstatements in proxy filings can attract the interest of securities lawyers and regulators, though there is no sign as yet that anyone is objecting to Kraft's figures.

That doesn't make the whole episode any less odd, however.

"It does seem out of the ordinary," said Eleanor Bloxham, who runs the Value Alliance corporate governance watchdog in Westerville, Ohio. "This is an M&A issue so it's a bigger deal."