Kellogg Keeps 2012 View; Guides 2013

Zacks

Kellogg Company (K) recently reaffirmed its guidance for 2012 and also issued fresh outlook for 2013.

For 2012, Kellogg expects its organic net sales growth to be 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 2%–4%. The organic revenue and operating profit guidance excludes the impact from the Pringles acquisition.

The world’s largest cereal maker expects its reported earnings per share to range between $3.18 and $3.30 in fiscal 2012. The guidance however includes impact from the Pringles acquisition and now the product recall costs.

For 2013, Kellogg expects net sales growth to be approximately 7%, while reported earnings are expected to grow between 5% and 7%.

Earlier this month, Kellogg had reported results for the third quarter. Earnings of 86 cents per share beat both the Zacks Consensus Estimate as well as the prior-year quarter earnings. Robust organic sales growth performance, which offset the headwinds from last month’s product recall (certain packages of Mini-Wheats cereals), led to the earnings outperformance.

Organically, revenues increased 2.8% in the quarter. Improving revenue trends in North America and strong performance of its Pringles business, acquired from Procter & Gamble (PG) in June this year, drove the top-line growth in the quarter.

Our Recommendation

We currently have a long-term Neutral recommendation on Kellogg. However, the stock jumped to a Zacks #2 Rank (a short-term Hold rating) following significant positive estimate revisions after announcement of solid third quarter results.

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 sluggish cereal business, challenges in Europe and rising input costs keep us on the sidelines

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