Kellogg Cuts 2012 View - Analyst Blog

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Kellogg Company ( K ) recently cut its 2012 financial outlook, just a few days before the release of first quarter earnings results, citing weak US volumes and a struggling European business.

The world's largest cereal maker also pre-announced its sales and earnings growth rates for the first quarter of 2012. Total revenue was down 1.3% in the quarter. However, organically (excluding impact of acquisitions and foreign exchange), revenues were flat with the prior-year quarter. The maker of popular brands like Pop-Tarts, Keebler and Eggo witnessed weak volume growth in some food categories in its US segment. The European business was also sluggish as the region continued to face difficult economic conditions and competitive activity. Kellogg's adjusted operating profit was also down 6.1%.

The company reported first quarter adjusted earnings per share of 95 cents (excluding the impact from the pending Pringles acquisition), 4 cents below the Zacks Consensus Estimate of 99 cents due to weak top-line results.

Following a weak start to 2012, the company lowered its overall financial guidance for fiscal 2012. For the year, the internal net sales growth guidance was cut from a prior range of 4%-5% to a band of 2%-3%.

Adjusted earnings per share are now expected to be $3.24-3.41 in fiscal 2012, down from the prior guidance of $3.45-$3.52. The guidance excludes any impact from the pending acquisition of the Pringles business from retail giant Procter & Gamble ( PG ). The $2.7 billion Pringles deal, which will dilute 2012 earnings by 6-11 cents per share, is expected to close in June this year. The Zacks Consensus Estimate for 2012 was $3.48 before the guidance cut was announced.

Operating profit is expected to decrease in the range of 2%-4% in 2012, down from prior expectations that profits would remain flat to slightly up from 2011 levels. Kellogg will release its first quarter financial results on April 26, 2012 before the market opens.

Our recommendation

We currently have a Neutral recommendation on Kellogg Company. The stock carries a Zacks #3 Rank in the near term ('Hold' rating).

Overall, we like the company's strong market position and its continued focus on brand building and innovation. The Pringles deal will provide additional growth opportunity in the fast growing emerging nations. It will also reduce Kellogg's dependence on its mainstay cereals business which is somewhat struggling. However, we are disappointed with the poor first quarter preliminary results and the related cut in guidance. The sluggish cereal business together with rising pressures in Europe keeps us on the sidelines.


 
KELLOGG CO ( K ): Free Stock Analysis Report
 
PROCTER & GAMBL ( PG ): Free Stock Analysis Report
 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



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