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Kellogg (K) Up 3.6% Since Earnings Report: Can It Continue?

Zacks Equity Research

It has been about a month since the last earnings report for Kellogg Company K. Shares have added about 3.6% in that time frame, outperforming the market.

Will the recent positive trend continue leading up to the stock's next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Kellogg Q1 Earnings Beat, Revenues Lag on Weak Demand

Kellogg’s first-quarter comparable earnings of $1.06 per share beat the Zacks Consensus Estimate of $1.01 by 5%. Earnings grew 10.4% year over year on productivity savings and a planned discrete tax benefit that offset the negative impact of currency translation.

Excluding currency headwinds of $0.03, earnings increased 13.5% year over year.

Adjusted earnings exclude costs associated with Project K, a mark-to-market loss and certain other items. Including these items, however, the company reported earnings of $0.74 per share, higher than the year-ago earnings of $0.49.

Revenues Miss

Kellogg reported revenues of $3.25 billion, reflecting a decrease of 4.1% year over year, marking the ninth straight quarter of a revenue decline. The weakness can be traced back to soft consumer demand across most parts of North America and Europe. Revenues fell shy of the Zacks Consensus Estimate of $3.33 billion by 2.2%.

Currency hurt sales by 1% in the quarter. Acquisitions and dispositions had a 1.6% positive impact on revenues. However, Venezuela deconsolidation had a 0.3% negative impact on the top line. Accordingly, organic revenues (excluding the impact of acquisitions, dispositions and foreign exchange) fell 4.4% compared with 1.4% growth in the previous quarter. Except Asia Pacific, organic sales decreased across all other regions.

Volumes dropped 5.7%, a lot lower than the 0.8% growth in the preceding quarter. On the other hand, price/mix added 1.3% to sales, higher than the 0.7% contribution last quarter.

Profits Rise

Kellogg’s comparable operating profit grew 0.4% to $518 million, partly hit by currency headwinds of 1.7%. Barring North America and Europe, profits improved across all the regions.

However, excluding the currency impact, adjusted operating profit increased approximately 2.2% on strong Project K cost savings.

Segment Discussion

North America: Kellogg’s North America sales dropped 4.2% (down 4.4% organically) year over year to $2.29 billion, due to a shift in the consumer preferences toward more healthier options over its processed food offerings. Volumes decreased 4.9% compared with 0.5% growth in the previous quarter. Price/mix was up 0.5% compared with a 0.1% drop in the prior quarter. Comparable operating profit decreased 1.6% in North America.

North America Business by Segment

U.S. Morning Foods: Revenues slipped 6.3% to $719 million. Organic sales also declined 6.3%, comparing unfavorably with the 1.1% decline in the previous quarter. The downside was mainly due to category-wide consumption slowdowns in January and February.

U.S. Snacks: This segment decreased 6.1% (also organically) to $781 million.

U.S. Specialty: This segment’s sales rose 5.1% (also organically) to $395 million.

North America Other (U.S. Frozen, Kashi and Canada): Segment revenues of $392 million declined 5.1%. Organically, it decreased 6.2%.

Europe: Segment revenues of $512 million declined 14.3% due to currency headwinds of 6.5%. Organically, sales were down 8.3% in the first quarter compared with a 1.1% drop in the last quarter. Organic operating profit declined 13.7%.

Latin America: Segment revenues of $222 million improved 15.8% (organically, revenues were down 0.9%) owing to 5.1% price/mix growth. This was partly offset by a 6% decline in volume and 2.9% currency headwind. Comparable operating profit increased 11.3% in Latin America.

Asia Pacific: Segment revenues of $232 million improved 7.3% led by strong growth across the region for Pringles. Organically, sales increased 2.9%. Comparable operating profit improved 35.3% in the Asia Pacific. Volumes and price/mix grew 2.2% and 0.7%, respectively, in the quarter.

Financial Details

As on Apr 1, 2017, cash and cash equivalents were $298 million, up from $280 million as of Dec 31, 2016.

In the quarter, operating cash flow after capex was $81 million, compared with cash used in operating activities of $139 million a year ago. Capital expenditure was $130 million against $144 million a year ago.

2017 Guidance

The company now expects revenues to decline about 3% (down 2% as expected earlier) on a currency-neutral comparable basis.

The company expects adjusted constant currency earnings (including the impact of Venezuela) in the range of $4.03–$4.09 per share.

However, including currency impact, adjusted EPS guidance is projected between $3.91 and $3.97.

Adjusted constant currency operating profit growth projection was maintained in the range of 7–9%. Operating margin is expected to improve more than a full percentage point, and is well on track to achieve its goal of 350 basis points expansion from 2015 through 2018.

2017-2018 Outlook

During 2016–2018, adjusted profit margin is expected to increase approximately 350 basis points from 2015 levels, reaching approximately 18% by 2018. This is two years earlier than expected previously driven by the expansion of ZBB initiative in North America and internationally along with stronger price realization via better revenue growth management. Kellogg previously expected to reach a 17–18% profit margin by 2020.

As the company increases focus on margin expansion, adjusted currency-neutral sales growth is expected to be approximately flat in 2017-2018.

How Have Estimates Been Moving Since Then?

Analysts were quiet during the last one month period as none of them issued any earnings estimate revisions.

Kellogg Company Price and Consensus

 

Kellogg Company Price and Consensus | Kellogg Company Quote

VGM Scores

At this time, Kellogg's stock has an average Growth Score of 'C', though it is lagging a lot on the momentum front with an 'F'. The stock was allocated a grade of 'C' on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of 'D'. If you aren't focused on one strategy, this score is the one you should be interested in.

Zacks' style scores indicate that the company's stock is suitable for value and growth investors.

Outlook

The stock has a Zacks Rank #4 (Sell). We are looking for a below average return from stock in the next few months.


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