On Dec 18, we maintained a Neutral recommendation on
). While the cereal and snack company's long-term fundamentals
appear solid, we remain sidelined due to its soft top-line
performance in the last two quarters.
Why the Neutral Recommendation?
Kellogg's top line has been sluggish for the past two quarters
due to weakness in the U.S. cereal and snacks businesses, its two
Kellogg's mainstay U.S. cereal business has been relatively
slow due to sluggish category growth. Persistent weakness within
adult varieties is weighing on category results. The U.S Morning
Foods business declined 2.2% in the third quarter and 3.3% in the
second quarter of 2013. Though the company is trying to
re-invigorate this segment by innovation and aggressive marketing
campaigns, these activities are yet to show results.
The U.S. snacks organic revenues declined in all the quarters
of 2013 due to weakness in crackers and cookies.
Weaker-than-expected sales in the U.S snacks and cereals
businesses in the past two quarters and expectations for weaker
developed market sales compelled Kellogg to squeeze its 2013
earnings and sales guidance. Estimates for the fourth quarter and
fiscal 2013 were largely revised downwards following the guidance
However, Kellogg's profits have been decent thanks to its
aggressive cost savings and productivity improvement efforts.
Kellogg's third-quarter adjusted earnings of 95 cents per share
beat the Zacks Consensus Estimate by 6.7% and prior-year
quarter's earnings by 2.2% as the softer top-line performance was
offset by overhead cost savings and lower taxes and
lower-than-expected currency headwinds.
Overall, we believe that Kellogg has strong fundamentals with
its solid brand positioning, geographic diversity and significant
investments in innovation, marketing and supply-chain
initiatives. We are also encouraged by the growth potential,
diversification and international presence that the Pringles deal
Moreover, the new cost savings plan, Project K, will free up
funds for brand building, innovation and overall growth. However,
the plan could easily take a couple of years before it delivers
Other Stocks to Consider
Kellogg carries a Zacks Rank #3 (Hold). Other better-ranked
stocks in the food industry include
The Hain Celestial Group, Inc.
Green Mountain Coffee Roasters, Inc.
United Natural Foods, Inc.
). All the three companies carry a Zacks Rank #2 (Buy).
GREEN MTN COFFE (GMCR): Free Stock Analysis
HAIN CELESTIAL (HAIN): Free Stock Analysis
KELLOGG CO (K): Free Stock Analysis Report
UTD NATURAL FDS (UNFI): Free Stock Analysis
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