Kellogg Up to Neutral - Analyst Blog


We recently upgraded our rating on Kellogg Company ( K ) to Neutral from Underperform following decent fourth quarter results and the acquisition of the Pringles business from Procter & Gamble Company ( PG ) which is likely to be a strategic fit for Kellogg.

Kellogg posted fourth-quarter 2011 earnings of 64 cents per share, beating the Zacks Consensus Estimate by a penny. Earnings also exceeded the prior-year earnings of 51 cents per share by 25% driven by strong revenue growth and increased focus on brand building investment and innovation. In fiscal 2011, earnings of $3.38 per share also surpassed both the Zacks Consensus Estimate by 1 cent and the prior-year estimate by 8 cents per share.

Total net sales in the quarter jumped 5.4% to $3.02 billion, which exceeded the Zacks Consensus Estimate of $2.99 billion and the prior-year quarter sales of $2.86 billion driven by a favorable price mix which offset a slight decline in volume expansion. Net sales in fiscal 2011 grew 6.5% to $13.2 billion, which was in line with the Zacks Consensus Estimate but above the prior-year quarter sales of $12.4 billion.

Overall, we like the company's strong market position and its continued focus on brand building and innovation. Management believes 2011 and 2012 are transition years for the company. 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 at a rate equal to or greater than the rate of revenue growth in 2011. Management is looking for substantial upside in 2012 sales numbers from its investments. It believes the revenue synergies from recent investment activities would have a positive long-term effect on the company's top line.

Kellogg entered into a deal to acquire Procter & Gamble's iconic brand of potato snack, Pringles, for $2.7 billion in February 2012. With the deal, Kellogg becomes a strong player in the savory salty snacks business, second only to PepsiCo, Inc ( PEP ). 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 to have a $2 billion market in this region once the Pringles acquisition is closed. Other than that, the Pringles addition 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. These initiatives, though creating near-term earnings headwinds, would help build a stronger foundation for growth in 2012 and beyond.

The company's efforts to drive profitability and brand equity are however tempered by the more mature and somewhat sluggish cereals business, economic uncertainty in Europe, margin headwinds from rising raw material prices and a high debt burden.

KELLOGG CO ( K ): Free Stock Analysis Report
PEPSICO INC ( PEP ): 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.

This article appears in: Investing , Business , Stocks

Referenced Stocks: K , PEP , PG

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