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Can Kellogg (K) Spring a Surprise this Earnings Season?

Kellogg CompanyK is slated to report fourth-quarter 2016 results on Feb 9, before the opening bell. Last quarter, the company posted a positive earnings surprise of 10.34%.

The cereal and snacks company delivered positive earnings surprises in each of the past four quarters, with an average surprise of 5.27%.

Let's see how things are shaping up prior to this announcement.

Factors to Consider

Kellogg has been struggling to drive sales over the past two years primarily due to weak performance by its cereal products in developed markets as well as soft U.S. snacks business owing to lower demand.

Excluding the extraordinary inflationary gains in Venezuela, Kellogg's organic sales declined 1.6% in the third quarter, 2% in the second quarter and 1% in first-quarter 2016 due to persistent weakness in North America and Europe. North America core sales declined 2.3% in the first nine months of 2016 due to soft U.S. cereals and snack sales. This, in turn, compelled Kellogg to lower its 2016 sales guidance thrice in 2016.

Moreover, as Kellogg generates around 40% of its net sales outside the U.S., it is exposed to currency headwinds.

That said, Kellogg boasts a legacy of over 100 years built on solid product portfolio and brand identity in both cereals and snacks. Amid tepid sales growth, the company is making aggressive efforts to improve its food offerings. To counter the sluggish sales trend, the company is investing in brand building, in-store capabilities along with product and packaging innovation.

Cost savings initiatives like Project K and zero-based budgeting (ZBB) program are somewhat compensating for the weakness in sales. Though the top line has been weak, Kellogg's margin growth has been impressive. During the third quarter, operating margin was up 260 basis points on the favorable impact of the above-mentioned initiatives.

Overall, the company is expected to finish 2016 with operating profit, driven more by margin expansion and less by net sales growth. Price realization is expected to be slightly positive in the fourth quarter.

For the fourth quarter, the Zacks Consensus Estimate for earnings is pegged at 85 cents, reflecting a 7.1% year-over-year rise, while the consensus for revenues is at $3.10 billion, implying a 1.4% year-over-year decline.

Earnings Whispers

Our proven model does not conclusively show that Kellogg is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below.

Zacks ESP: The Earnings ESP is 0.00% as the Most Accurate estimate of 85 cents per share is in line with the Zacks Consensus Estimate. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Zacks Rank: Kellogg's Zacks Rank #3 increases the predictive power of ESP. However, we need to have a positive ESP to be confident about a positive earnings surprise.

We caution against Sell-rated stocks (Zacks Rank #4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Kellogg Company Price and EPS Surprise

Kellogg Company Price and EPS Surprise | Kellogg Company Quote

Stocks to Consider

Some stocks in the consumer staples sector that have both a positive Earnings ESP and a favorable Zacks Rank include:

Coty Inc. COTY , slated to report its quarterly numbers on Feb 9, has an Earnings ESP of +8.33% and a Zacks Rank #3.

Sanderson Farms, Inc. SAFM has an Earnings ESP of +4.48% and a Zacks Rank #3. The company is scheduled to report its quarterly numbers on Feb 23. You can see the complete list of today's Zacks #1 Rank stocks here .

Pinnacle Foods, Inc. PF has an Earnings ESP of +1.27% and a Zacks Rank #2. The company is scheduled to report its quarterly numbers on Feb 23.

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Kellogg Company (K): Free Stock Analysis Report

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Pinnacle Foods, Inc. (PF): 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 Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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