We have maintained our Neutral recommendation on
) following the appraisal of second quarter 2012 results.
Kellogg's second quarter 2012 adjusted earnings per share of 89
cents per share beat the Zacks Consensus Estimate of 84 cents per
share due to higher-than-expected revenues. The second quarter
earnings however lagged the prior-year quarter earnings of 94 cents
per share due to weak revenues in Europe, high commodity costs and
investments in supply-chain initiatives.
The world's largest cereal maker reported revenue of $3.5
billion in the quarter, up 2.6% year over year. Revenues improved
almost 3% from the first quarter. Improving revenue trends in North
America and the addition of Pringles drove the top-line growth in
the quarter. Kellogg bought Pringles snacks business from
Procter & Gamble
) in June 2012. Revenues were also above the Zacks Consensus
Estimate of $3.4 billion.
Gross margins declined 190 bps to 40.7% in the quarter due to
commodity cost increases, lower fixed cost absorption related to
inventory reduction, supply-chain initiatives and the addition of
Pringles. The adjusted operating profit declined 5% due to
commodity cost inflation, sluggish European results and investments
in supply-chain initiatives.
Management maintained its outlook for 2012 as it expects better
revenue and profit growth in the second half helped by its
brand-building investments and supply-chain initiatives.
We are encouraged by Kellogg's solid brand positioning, its
geographic diversity and cost saving initiatives. We like the
company's continued focus on brand building and innovation.
Management believes the continued investment in brand building will
generate substantial sales from new products. In 2011, the company
made significant investments in brand building, which led to $800
million in incremental sales from innovation. In 2012, management
plans to continue to invest in brand building at a rate equal to or
greater than the rate of revenue growth in 2011. In 2012,
innovation is expected to generate sales of $900 million.
The Pringles deal has made Kellogg a strong player in the snacks
business, second only to
). Further, we believe the Pringles buyout is likely to reduce
Kellogg's dependence on its mainstay cereal business which is
currently struggling. The Pringles acquisition will also provide
additional growth opportunities in the fast growing emerging
nations. Management expects Pringles to fetch a market of another
$2 billion. Besides, Pringles is expected to boost revenues by more
than $500 million in North America. The combined company is
expected to generate more than $15 billion in annual sales and over
$6 billion in snacks sales globally.
Further, Kellogg's continued cost-reduction initiatives are
aimed at providing greater visibility in achieving its long-term
profit growth targets. In 2010, Kellogg began investing in its
supply-chain initiatives. In 2011, the company increased its
investment in these initiatives by $100 million. Though these
initiatives resulted in a slowdown in earnings growth in the first
half, but they are expected to be a tailwind in the second half of
2012 to build a stronger foundation for future growth.
The company's efforts to drive profitability and brand equity
are however tempered by the more matured and somewhat sluggish
cereals business and economic uncertainty in Europe. Kellogg's
mainstay U.S. cereal business has grown in the low single digits in
the past few quarters. Moreover, the European business has
consistently recorded both sales and operating profit declines as
the region continues to face difficult economic conditions and
competitive activity. The company still expects this region to
remain challenging in 2012. Margin headwinds from rising raw
material prices and a high debt burden remain areas of concern.
KELLOGG CO (K): Free Stock Analysis Report
PEPSICO INC (PEP): Free Stock Analysis Report
PROCTER & GAMBL (PG): Free Stock Analysis
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