The Kellogg Company
(
K
) recently reaffirmed its earnings guidance for 2012despite
incurring charges for the recent recall of certain packages of
Mini-Wheats cereal. The costs for the recall, which are expected to
range between $20 million and $30 million, will be recorded in the
third quarter. Management mentioned that strong performance of its
Pringles business, acquired from
Procter & Gamble
(
PG
) in June this year, will offset the headwinds due to this
recall.
The 2012 earnings guidance ranges between $3.18 and 3.30. At the
second quarter conference call, Kellogg's management had provided a
detailed financial outlook for 2012. Despite the not-so-great
second quarter results, Kellogg expects the second half of the year
to see better revenue and profit growth. Second half growth is
expected to benefit from its brand building investments, increased
contribution from innovation and the addition of Pringles.
Organic net sales growth is expected to range between 2% and 3%
in 2012. Price/mix is expected to be a tailwind, while volumes will
decline. Management expects product innovation to generate revenue
of $900 million in 2012 compared to $800 million in 2011 and $600
million in 2010.
Gross margins are expected to be down less than 100 basis points
in the quarter from 2011 levels, excluding Pringles. However,
including Pringles, gross margins are expected to be down slightly
more than 100 basis points. Operating profit for 2012 is expected
to decline in the range of 2%-4%. The organic revenue and operating
profit guidance excludes the impact from the Pringles
acquisition.
Our Recommendation
We currently have a Neutral recommendation on Kellogg. The stock
carries a Zacks #3 Rank (a short-term 'Hold' rating).
We are optimistic about Kellogg's solid brand positioning, its
geographic diversity and cost-saving efforts, especially its
supply-chain initiatives. Moreover, we are encouraged by the growth
potential, diversification and international presence that the
Pringles deal provides. However, its sluggish cereal business,
challenges in Europe and rising input costs keep us on the
sidelines.
KELLOGG CO (K): Free Stock Analysis Report
PROCTER & GAMBL (PG): Free Stock Analysis
Report
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