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Yamil Berard
Yamil Berard
Articles (192) 

Will Kellogg Get Back Its Snap, Crackle, Pop?

A new earnings report suggests the company may be breathing life into its tired brand. A pair of new acquisitions and a cost-cutting initiative are paying off

February 08, 2018 | About:

Kellogg Co. (NYSE:K) got a thumbs-up from Wall Street after quarterly figures it released on Thursday indicated signs of snap, crackle, pop.

On a day when the Dow Jones Industrial lost over 1,000 points to stand at 23,860 (that's a 4.15% loss), Kellogg shares were up by as much as 4% to $66.99 a share. At market close, the stock was up more than 2%.

That's a reversal from its performance over the last 12 months; it has seen a 14% drop.

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The company has been hard at work trying to recharge its tired cereal brand, as Americans have switched to healthier choices and breakfast alternatives. Its fourth-quarter earnings indicate some of its restructuring and cost-cutting efforts are paying off, after years of declining profit margins and sinking revenues.

Kellogg beat analyst revenue expectations of $3.21 billion in the quarter ended Dec. 30. The figure represents a 3.6% jump from the prior-year quarter of $3 billion, earnings showed.

In earnings per share, the company posted a 3.3% increase over the prior-year quarter to 94 cents per share, a currency-neutral adjustment that includes fluctuations in currency.

Pair of acquisitions

The company attributes a nearly 4% jump in revenue to a pair of acquisitions it made in the last  one-and-a-half years or so. In October, Kellogg acquired RXBAR, a protein bar that mixes egg whites with healthy nuts. Prior to that, in December 2016, it acquired Brazilian group Parati, which sells Hot Cracker Biscuits.

Kellogg’s CEO Steven Cahillane characterized 2018 as a “transition year” for the company. (Cahillane joined Kellogg in October.)

Cost-cutting

Last year, the company began transferring snack inventory to retailers’ warehouses from Kellogg distribution centers.

In doing so, the company cut costs by reducing its workforce and exiting leases for its distribution centers, trucks and other equipment.

In its earnings report, the company stated that profits rose owing to lower restructuring charges and overhead reductions related to the transition.

It has also employed a series of cost-reduction activities under what it has called “Project K.” It hopes to generate $425 million to $475 million in annual cost savings by 2018 as part of the program.

Weaknesses

A continuing soft market for U.S. morning foods continues to be a drag, as Americans are choosing Greek yogurt over cereal. The effects can be seen in the company’s annual revenue figures. It saw a 0.7% decline in revenues over the year ended Dec. 30, 2017.

In 2016, the company saw revenues of $13 billion compared to $12.92 billion in 2017.

In comparable net sales, which includes currency fluctuations, the company saw a 2.6% drop to $12.6 billion in 2017 from the prior year.

In Thursday’s earnings call, officials said they hoped to stabilize its U.S. morning breakfast sector by focusing on brand-building, nutrition and in-store execution.

One idea is to push cereal during other times of the day for snacking and dessert.

Other numbers

Cash, as of the last quarter, or third-quarter of 2017, showed up as $267 million on the company's balance sheet. Long-term debt for same quarter was $7.2 billion. For full year 2016, long-term debt stood at $6.7 billion.

The company is projecting cash from operating activities to increase between $1.7 billion and $1.8 billion in 2018, driven by higher net income, sustained working capital improvement and benefits from the new tax law. With capital expenditure remaining roughly flat at $500 million, the implication is that cash flow will be $1.2 billion to $1.3 billion, earnings showed.

GuruFocus indicators

Kellogg has a market cap of $22.83 billion.

It is rated a 4 of 10 in financial strength and a 6 of 10 in profitability and growth.

It has a price-earnings (P/E) ratio of 29.50 versus an industry median of 19.68.

Its price-book (P/B) ratio is 11.82 versus an industry median of 1.75.

Its price-sales (P/S) ratio is 1.79 versus an industry median of 1.05.

Gurus who own shares of the company include the T. Rowe Price Equity Income Fund, Mario Gabelli (Trades, Portfolio), Richard Pzena (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), George Soros (Trades, Portfolio) and Hotchkis & Wiley.

T. Rowe Price now holds more than 1.37 million shares of the company after adding 70,000 shares as of Dec. 31. It had a 0.02% impact on the portfolio. Shares have risen by 6% since the fund began buying in 2012.

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Gabelli holds 739,000 shares after reducing his position by 3.4% as of Dec. 31. It had less than 0.01% impact on his portfolio.

According to the Peter Lynch chart, the stock is overvalued. The median is $33.60 a share.

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