Will Kellogg (K) Disappoint Earnings Season on Weak Cereals?

Kellogg Company K is set to report second-quarter fiscal 2014 results on Jul 31, before the market opens. Last quarter, the company delivered a positive earnings surprise of 4.12%. Let's see how things are shaping up for this announcement.

Factors to Consider this Quarter

Kellogg's mainstay U.S. cereal business, accounting for 40–45% of sales, has been performing poorly since 2012 due to sluggish category growth. Lower demand for cereals due to competitive pressures from alternatives including yogurt, eggs, bread and peanut butter is hurting category growth. More recently, the company witnessed cereal category weakness in other developed countries like the U.K., Canada and Australia. Moreover, though snacks improved slightly in the first quarter, it did not do too well in 2013.

However, in the second quarter, management expects the top line to return to growth after witnessing sales decline in the previous two quarters. Kellogg expects volume trends to improve over the remainder of the year driven by significant increase in brand building investments, mainly behind the core categories. Moreover, price mix is expected to remain positive throughout the year.

However, adjusted operating profit is expected to decline slightly in the second quarter due to higher brand building investment. Brand building investments are expected to increase in a high single-digit range in the quarter, followed by further improvement during the third quarter. Adjusted currency neutral earnings are expected to be approximately $1.02 per share, in line with the comparable last-year quarter.

Earnings Whispers?

Our proven model does not conclusively show that Kellogg is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESPand a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here, as you will see below.

Negative Zacks ESP:  The Earnings ESP is -0.98%.

Zacks Rank: Kellogg carries a Zacks Rank #4 (Sell). We caution against stocks with Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider

Other food/beverage stocks that have both a positive Earnings ESP and a favorable Zacks Rank are:

Treehouse Foods, Inc.THS, with Earnings ESP of +1.21% and a Zacks Rank #1 (Strong Buy).

The J.M. Smucker Co. SJM with Earnings ESP of +1.46% and a Zacks Rank #3(Hold).

Keurig Green Mountain, Inc. GMCR with Earnings ESP of +2.30% and a Zacks Rank #3 (Hold).

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