We have maintained our Neutral rating on
) following appraisal of first quarter 2012 results.
As previously announced on April 24, Kellogg's first quarter
2012 earnings per share of 95 cents missed the Zacks Consensus
Estimate of 98 cents.The first quarter earnings also lagged the
prior-year figure of $1.00 per share. Weak revenues in Europe and
in the U.S. cereal category, high commodity costs and investments
in supply chain initiatives led to the earnings miss in the
The world's largest cereal maker reported revenue of $3.44
billion, down 1.3% in the quarter, mainly due to the sluggish
European business and weakness in the U.S. cereal category.
Gross margins declined 90 bps to 39.9% in the quarter due to
lower revenues, commodity cost increases and supply chain
initiatives. Kellogg's adjusted operating profit dropped 6.1%.
Kellogg also slashed its 2012 financial outlook following the weak
start to the year.
Despite the first quarter miss and the related cut in guidance
we are bullish on the long-term prospects of the company due to its
solid brand positioning, its geographic diversity and cost saving
initiatives. We like the company's continued focus on brand
building and innovation. Management earmarked 2011 and 2012 as
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 believes the revenue synergies
from recent investment activities would have a positive long-term
effect on the company's top line.
In June 2012, Kellogg completed the acquisition of
Procter & Gamble
) snack unit, which included the iconic Pringles brand, for $2.7
billion. With the deal, Kellogg becomes 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. 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 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. Management expects this business to remain
challenging in 2012 and grow no faster than its present rate.
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
has also cut down on brand-building and overhead costs in Europe to
counter revenue headwinds. The company still expects this region to
remain challenging in 2012 with hope of some recovery in the second
half. Margin headwinds from rising raw material prices and a high
debt burden remain areas of concern.
KELLOGG CO (K): Free Stock Analysis Report
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PROCTER & GAMBL (PG): Free Stock Analysis
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