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Kellogg (K) Down 0.3% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

It has been about a month since the last earnings report for Kellogg (K). Shares have lost about 0.3% in that time frame, underperforming the S&P 500.

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

Kellogg Q1 Earnings & Sales Beat Estimates, Down Y/Y

Kellogg reported first-quarter 2020 results, with both earnings and sales surpassing the Zacks Consensus Estimate. However, both metrics declined year over year due to impacts from the divestiture of the cookies, fruit snacks, pie crusts and ice-cream cone businesses (concluded in July 2019). However, results gained from a considerable increase in global demand for packaged foods in March, as the coronavirus-led stay-at-home trend has been leading consumers to hoard stocks.

Kellogg reiterated its guidance for 2020, expecting a shift in sales and earnings toward the first half of the year.

Quarter in Detail

Adjusted earnings of 99 cents per share dipped 2% year over year, though it beat the Zacks Consensus Estimate of 94 cents. Results were hurt by the absence of divested businesses, partly compensated by growth in other businesses. On a constant-currency (cc) basis, adjusted earnings came in at $1 per share, which dipped 1% from the year-ago quarter’s figure.

The company delivered net sales of $3,412 million, which slipped 3.1% year over year. Nevertheless, the figure surpassed the consensus mark of $3,356 million. The year-over-year downside was caused by impacts from the divestiture of the company’s cookies, fruit snacks, pie crusts and ice-cream cone businesses. Absence of the divested businesses affected sales by about 9%. Also, currency headwinds had a roughly 2% impact on the top line.

Organic sales (excluding currency and divestitures) moved up 8% to $3,464 million. Management highlighted that more than half of the first-quarter growth was attributable to increased buying of consumers due to the coronavirus-led stockpiling. Apart from this, organic sales were backed by underlying business growth across categories and regions.

Adjusted operating profit fell 5.7% to $439 million, owing to currency headwinds and the absence of the divested businesses. The metric dropped 4.4% to $445 million at cc.

Segment Discussion

Sales in the North America segment amounted to $2,097 million, down 8.4% due to divestiture impacts. Sales grew 6% on an organic basis, courtesy of consumption gains in core brands and categories along with increased shipments to support burgeoning demand for packaged food amid the coronavirus-led lockdown. Moreover, adjusted operating profit declined nearly 7% at cc.

Revenues in the Europe segment totaled $526 million, up 5.9% year on year, despite currency headwinds. Further, sales rose about 9% on an organic basis, on the back of increased packaged food demand. Adjusted operating profit improved roughly 7% at cc.

Revenues in Latin America totaled $226 million, up 0.8% year on year even amid major currency woes. Sales grew 11% on an organic basis, thanks to the coronavirus-led stock hoarding of packaged goods. Adjusted operating profit improved by 4% at cc on the back of improved sales.

Revenues in the Asia, Middle East & Africa segment totaled $562 million, up 10% year over year, despite currency headwinds. Sales improved about 13% on an organic basis, backed by strength in emerging markets, especially Nigeria. Further, sales were backed by increased demand for packaged foods amid the coronavirus crisis in Australia, New Zealand, Japan and South Africa. Thanks to higher sales, adjusted operating profit rose 5% at cc.

Other Financials

Kellogg ended the quarter with cash and cash equivalents of $1,016 million, long-term debt of $7,163 million and total equity of $3,212 million. In the first quarter, the company generated cash from operating activities of $391 million.

Cash flow from operating activities is likely to be $1.5-$1.6 billion in 2020. Capital expenditures are expected to be roughly $0.6 billion and cash flow is still expected in the range of $0.9-$1 billion.

2020 Guidance

Management reiterated its 2020 guidance. The company now expects sales and profits to flow in more during the first half. Organic sales in 2020 are still expected to grow 1-2%. Adjusted operating profit is expected to decline 4% at cc and adjusted earnings to drop 3-4% at cc due to divestiture impacts.

How Have Estimates Been Moving Since Then?

Estimates revision followed an upward path over the past two months.

VGM Scores

At this time, Kellogg has a great Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Charting a somewhat similar path, 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 A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Kellogg has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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