Credit Suisse Upgrades Kellogg Following Q3 Results

• Shares of Kellogg Company K have appreciated 6.57 percent in the last six months, reaching a high of $72.01 on October 22.
• Robert Moskow of Credit Suisse has upgraded the rating on the company from Underperform to Neutral, while raising the price target from $66 to $72.
• Moskow believes that there are signs of stabilization in Kellogg’s business, while management appears to have “a greater sense of urgency to deliver stronger results.”

Analyst Robert Moskow also mentioned that “this urgency stems from increased pressure from either the board or outside shareholders,” and expects the company to be able to achieve its target of returning to EPS growth of 6-8 percent in 2016.

The company has been able to achieve $100 million in savings from its Zero-Based Budgeting initiative in North America, in addition to the $100 million that was achieved via restructuring savings from Project K.

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“The company needs to reinvest a good portion of these savings into ingredient and packaging improvements to keep up with changes in consumer demand. But management clearly indicated its willingness to drop savings to the bottom line as well,” the Credit Suisse report stated.

Kellogg has increased its free cash flow guidance to $1.1 billion, driven by robust benefits from its supplier financing programs. Moskow believes that the company has achieved operating working capital reduction of $450 million over the past three years.

The company is expected to achieve free cash flow of as much as $1.6 billion by 2017, when the cash spending on Project K starts to wane.

For Q3, Kellogg reported its organic sales growth and operating profit decline marginally below the consensus but in-line with the guidance. Operating margins would have increased 6 percent in the absence of FX headwinds and the management compensation reset.

Although the company reported volume growth in Latin America and Asia, there was a meaningful decline in the Eggo business, along with a volume decline in Australia and the U.S. Kashi and European businesses.