On Jan 24, we maintained a Neutral recommendation on
), following its third quarter results.
Why the Neutral Recommendation?
Kellogg's third quarter 2012 earnings of 86 cents per share
beat the Zacks Consensus Estimate by 6.2% and prior-year quarter
earnings by 7.5%. Robust organic sales growth performance offset
the headwinds from last month's product recall to deliver the
earnings beat. Revenue rose 2.8% organically to $3.7 billion,
boosted by the addition of Pringles, bought from
Procter & Gamble
) in Jun 2012, and improving revenue trends in North
America. The overall results were in line with management's
While Kellogg lowered its full year 2012 organic operating
profit outlook due to headwinds from the product recall, it
maintained its organic sales growth guidance.
Kellogg will report its fourth quarter and full year 2012
results early next month. For 2012, Kellogg maintained its
organic net sales growth guidance in a band of 2%-3%. Internal
operating profit for 2012 is expected to decline in the range of
4%-6%, higher than prior expectations of a 2%-4% fall. Gross
margins, including Pringles and product recall costs are expected
to be a tad below 150 basis points. Reported earnings per share
are expected to range between $3.18 and $3.30 in fiscal 2012,
including the impact of the Pringles acquisition and the product
The Zacks Consensus Estimate stands at 65 cents for the
quarter and $3.35 for the full year. Estimates are mostly showing
an upward trend ahead of the results. In fact this cereals and
snack maker has beaten the Zacks Consensus Estimates in the past
four straight quarters with an average earnings surprise of
Overall, we are optimistic about Kellogg's solid brand
positioning, its geographic diversity and cost-saving efforts,
especially its supply-chain initiatives. Moreover, we are
encouraged by the growth potential, diversification and
international presence that the Pringles deal provides.
However, its legacy cereals business has remained sluggish
since the past few quarters. Though the latter showed some
improvement in the third quarter, we expect to see a more broad
based and sustained growth. Further, Kellogg's European business
has consistently recorded both sales and operating profit
declines as the region continues to face difficult economic
conditions and competitive activity. Despite seeing some early
signs of improvement, mainly in U.K., management is entering 2013
while remaining cautious on the segment due to difficult
operating conditions in southern Europe. These factors keep us on
Other Stocks to Consider
Kellogg carries a Zacks Rank #2 (Buy). Other stocks in the
food industry that are currently performing well and have a
bright outlook include
B&G Foods, Inc.
) - Zacks Rank #1 (Strong Buy) and
ConAgra Foods, Inc.
) - Zacks Rank #2 (Buy).
B&G FOODS CL-A (BGS): Free Stock Analysis
CONAGRA FOODS (CAG): Free Stock Analysis
KELLOGG CO (K): Free Stock Analysis Report
PROCTER & GAMBL (PG): Free Stock Analysis
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