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Kellogg (K) Gains More Than 10% in 3 Months: Will Growth Stay?

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Like several food companies, Kellogg Company K has been benefiting from burgeoning demand amid the pandemic. Further, the company’s brand strength, especially in Pringles, has been a driver. Such trends helped Kellogg retain its organic sales trend in first-quarter 2021, wherein both earnings and sales advanced year over year and beat the Zacks Consensus Estimate.

However, the company’s away-from-home channels have seen sharp declines amid the pandemic due to limitations and shutdowns. Also, input cost inflation and high COVID-19 costs, along with increased brand investments, pose threats to margins. Nevertheless, management’s raised view for 2021 instills optimism. Incidentally, the Zacks Consensus Estimate for 2021 earnings has gone up nearly 2% to $4.09 per share over the past 30 days. Further, the company’s shares have rallied 14.4% in the past three months compared with the industry’s growth of 11.2%.

Solid Q1 & View

In first-quarter 2021, adjusted earnings of $1.11 per share increased 12.1% year over year on the back of elevated net sales and operating leverage. On a constant currency or cc basis, adjusted earnings per share grew 8.1% to $1.07. Also, the bottom line exceeded the Zacks Consensus Estimate of 95 cents. Net sales of $3,584 million advanced 5.1% year on year and surpassed the consensus mark of $3,401 million. Together, these upsides helped the company battle the continued weakness in the away-from-home channel as well as on-the-go occasions. Organic sales moved up 4%. Markedly, the strong quarterly performance reflected continued momentum across all major brands and categories, along with increased growth in emerging markets. Net sales were aided by burgeoning demand for packaged foods, stemming from increased at-home consumption amid the pandemic.

Kellogg Company Price, Consensus and EPS Surprise

Kellogg Company Price, Consensus and EPS Surprise
Kellogg Company Price, Consensus and EPS Surprise

Kellogg Company price-consensus-eps-surprise-chart | Kellogg Company Quote

Apart from these, the company’s solid revenue management and productivity efforts helped it tackle increasing cost inflation. Organic sales growth in 2021 is now estimated to be nearly flat year over year compared with the previously guided view of nearly a 1% decline. The updated view implies a two-year compound annual increase of almost 3%, up from nearly 2.5% expected earlier. Adjusted earnings per share are expected to grow 1-2% at cc now, up from the 1% growth anticipated earlier. This indicates a two-year compound annual increase of 5% now compared with 4-5% growth envisioned before.

What’s Working Well for Kellogg?

The company is benefiting from its solidified capabilities in the digital, e-commerce, and data and analytics arena and is on track to expand capacity. Incidentally, online shopping for food witnessed a sea change in 2020, wherein Kellogg’s e-commerce sales soared in triple digits. This was accountable to its brand strength and investments toward enhancing infrastructure and capabilities, which are likely to continue working in the company’s favor.

Additionally, on its first-quarter 2021 earnings call, management said that it is impressed with its emerging market performance. The company has been growing in these regions, even amid the tough pandemic-related conditions. Markedly, emerging markets formed more than 20% of Kellogg’s top line last year. In 2020, emerging market businesses witnessed accelerated sales growth despite the pandemic-led shutdowns, economic hiccups from reduced oil prices as well as bouts of political and social challenges. This can be accountable to Kellogg’s solid brand strength; strong product portfolio; prudent supply-chain structure and efficient management teams in these regions. The company remains focused on expanding scale in emerging markets, by using capacities like data and analytics, innovation, and e-commerce.

Is all Rosy for Kellogg?

While higher at-home consumption is driving Kellogg’s retail demand, the company has been seeing softness in the away-from-home network. Incidentally, away-from-home channels have seen sharp declines amid the pandemic due to limitations and shutdowns. Away-from-home channels continued to be weak in the first quarter of 2021, though the rate of decline moderated sequentially.

Apart from this, the company continued to encounter increased input cost inflation and high COVID costs in the first quarter. Management on its first-quarter earnings call stated that the company saw the toughest year-over-year gross margin comparison in the second quarter. Nonetheless, it is making concerted efforts to keep its margin as close as possible to the year-ago levels in the second half of 2021, despite the increased shift toward emerging markets and elevated cost inflation. The company also saw its toughest comparison related to brand-building investments in the second quarter, while it expects to return to more normal levels in the second half.

All said, we expect this Zacks Rank #3 (Hold) company’s abovementioned upsides to help it tide over the barriers and keep its growth story going. Markedly, the company has a long-term earnings per share growth rate of 4.5%.

3 Solid Food Stocks to Binge On

Medifast MED, which currently carries a Zacks Rank #1 (Strong Buy), has a trailing four-quarter earnings surprise of 12.7%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

United Natural UNFI has a Zacks Rank #2 (Buy) and its bottom line outpaced the Zacks Consensus Estimate by 13.6% in the trailing four quarters, on average.

Nomad Foods NOMD has a Zacks Rank #2 and its bottom line outpaced the Zacks Consensus Estimate by 10.3% in the trailing four quarters, on average.

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