On Jul 2, we maintained a Neutral recommendation on
). While the cereal and snack company's long-term fundamentals
appear solid, we remain sidelined due to its lower-than-expected
Why the Neutral Recommendation?
On May 2, 2013, Kellogg announced its first-quarter 2013
results. Kellogg's first-quarter earnings of 99 cents per
share missed the Zacks Consensus Estimate by 2.9%. Earnings
declined 8.3% from the prior-year quarter due to higher commodity
cost inflation and lower-than-expected sales. Revenues missed the
Zacks Consensus Estimate and rose only 2.2% organically due to
lower volumes and sluggishness in the U.S. snacks and Asia
Pacific businesses. Gross margin declined 330 basis points (bps)
in the quarter largely due to a 200 bps headwind from commodity
While the second quarter will also be tough due to continued
softness in the snacks segment and cost inflation, results are
expected to improve in the next half of the year on the back of
higher cost savings and commodity cost deflation.
We are optimistic about Kellogg's solid brand positioning, its
geographic diversity and significant investments behind
innovation, marketing and supply-chain initiatives. Moreover, we
are encouraged by the growth potential, diversification and
international presence that the Pringles deal provides.
However, the challenged cereal business, pressures in Europe
and the rising input costs keep us on the sidelines. Kellogg's
mainstay U.S. cereal business has witnessed a relatively slow
business due to sluggish category growth. Though improving trends
have been noticed in the past two quarters, we would like to see
a broader and sustained growth in the category. The European
business has been sluggish of late, though some improvement is
being seen in the U.K. and France. Increasing prices of raw
materials have hurt the company's margins significantly in 2011
and 2012. In 2013, Kellogg expects $80 million of commodity cost
inflation which will further hurt margins.
Other Stocks to Consider
Kellogg carries a Zacks Rank #3 (Hold). Other stocks in the
food industry that are currently performing well and have a
bright outlook include
Flower Foods Inc.
Omega Protein Corp.
B&G Foods Inc.
), all carrying a Zacks Rank #1 (Strong Buy).
B&G FOODS CL-A (BGS): Free Stock Analysis
FLOWERS FOODS (FLO): Free Stock Analysis
KELLOGG CO (K): Free Stock Analysis Report
OMEGA PROTEIN (OME): Free Stock Analysis
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