U.S. Markets open in 18 mins.

Risk Reward Balanced at Kellogg

Zacks Equity Research

On Sep 25, we maintained a Neutral recommendation on Kellogg Company (K). While the cereal and snack company’s long-term fundamentals appear solid, we remain sidelined due to its soft top-line performance in the last two quarters.

Why the Neutral Recommendation?

On Aug 1, 2013, Kellogg announced second-quarter 2013 results wherein the adjusted earnings of $1.00 per share came ahead of the Zacks Consensus Estimate of 97 cents by 3.1%. The second-quarter earnings also increased 5.3% from the prior-year quarter figure of 95 cents per share as operating profit growth made up for the disappointing top-line performance in the quarter.

Revenues missed the Zacks Consensus Estimate and declined 0.5% organically due to lower volumes and sluggishness in U.S. snacks and cereals, two of the largest businesses for Kellogg. Weakness in Europe also took a toll on revenues.

Moreover, weaker developed market sales and increased currency headwinds compelled Kellogg to squeeze its 2013 sales guidance.

Estimates were largely revised downwards following the revenue guidance cut. The Zacks Consensus Estimate for 2013 and 2014 declined around 2% over the last 60 days.

Overall, we believe that Kellogg has strong fundamentals with its solid brand positioning, geographic diversity and significant investments in innovation, marketing and supply-chain initiatives. We are also encouraged by the growth potential, diversification and international presence that the Pringles deal provides.

However, the challenged cereal business, pressures in Europe and the rising input costs keep us on the sidelines. Kellogg’s mainstay – U.S. cereal business – has been relatively slow due to sluggish category growth. Though the company is trying to re-invigorate this segment by innovation and aggressive marketing campaigns, these activities are yet to show results. The European business has been sluggish of late, inspite of improvement in the U.K.

Other Stocks to Consider

Kellogg carries a Zacks Rank #3 (Hold). Other stocks in the food industry that are currently performing well and have a bright outlook include Pinnacle Foods Inc.(PF), Green Mountain Coffee Roasters, Inc(GMCR) and Treehouse Foods, Inc. (THS). While PF and GMCR carry a Zacks Rank #1 (Strong Buy), THS carries a Zacks Rank #2 (Buy).

Read the Full Research Report on KRead the Full Research Report on GMCRRead the Full Research Report on PFRead the Full Research Report on THSZacks Investment Research