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Kellogg (K) Down 0.4% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

A month has gone by since the last earnings report for Kellogg (K). Shares have lost about 0.4% in that time frame, outperforming 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 its most recent earnings report in order to get a better handle on the important catalysts.

Kellogg Q4 Earnings Top Estimates, Sales Decline Y/Y

Kellogg Company reported fourth-quarter 2019 results, with earnings and sales surpassing the Zacks Consensus Estimate. However, the topline declined year over year due to impacts from the divestiture of the company’s cookies, fruit snacks, pie crusts and ice-cream cones businesses.

Q4 in Detail

Adjusted earnings of 91 cents per share were flat year over year. Moreover, the metric beat the Zacks Consensus Estimate of 86 cents. Reduced net interest expenses and increased other income were offset by the absence of results from divested businesses. On a constant-currency (cc) basis, adjusted earnings came in at 99 cents per share that werein line with the year-ago quarter’s figure.

The company delivered net sales of $3,223 million, which slipped 2.8% year over year. Nevertheless, the figure surpassed the consensus mark of $3,198 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 cones businesses. Absence of the divested businesses dragged sales by about 6%. Sales dropped 2.8% to $3,224 million at cc. Further, organic revenues moved up 2.7% to $3,224 million.

Adjusted operating profit fell 6.8% to $403 million, as improvement in the base business was more than offset by the impact from absence of the divested businesses. The metric dropped 6.9% to $403 million at cc.

Segment Discussion

Sales in the North America segment amounted to $1,894 million, down 7.3% due to divestiture impacts. Sales inched up more than 1% on an organic basis, courtesy of continued consumption gains in categories like Cheez-It, Pringles, Rice Krispies Treats and Pop-Tarts among others. Moreover, adjusted operating profit declined 5%.

Revenues in the Europe segment totaled $526 million, up 2.9% year on year. Further, sales rose more than 3% on organic basis, backed by sustained momentum in snacks category, especially Pringles brand. Adjusted operating profit improved 15% at cc on increased sales and better profit margins.

Revenues in Latin America totaled $233 million, down 1.6% year on year. Sales were marginally higher on an organic basis. The company witnessed certain macroeconomic headwinds in Puerto Rico, Argentina and Brazil along with the transition of distributors in Central America.

Nevertheless, continued consumption growth in cereal, salty snacks, and portable wholesome snacks across Mexico along with stabilization in the Andean markets and market share gains in major categories across Brazil bode well. Notably, the company started ramping up its new production facility in Brazil during the quarter. Adjusted operating profit fell roughly 21% at cc, due to higher costs and impact of absence of the divested businesses.

Revenues in the Asia, Middle East & Africa segment totaled $570 million, up 8.4% year over year. Sales improved about 8% on organic basis, backed by strength in Africa and Asia. However, adjusted operating profit declined 7% at cc.

Other Financials

Kellogg ended the quarter with cash and cash equivalents of $397 million, long-term debt of $7,195 million and total equity of $3,314 million.

For 2019, the company generated cash from operating activities of $1,176 million.

2020 Guidance

That said, sales in 2020 are expected to grow 1-2% on an organic basis. Further, adjusted operating profit (at cc) is expected to decline 4% due to divestiture impacts.

Kellogg envisions adjusted earnings to drop 3-4% at cc. The expected year-over-year decline was caused by divestiture impacts.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -11.57% due to these changes.

VGM Scores

Currently, Kellogg has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. However, 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.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. It's no surprise Kellogg has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.



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