Will Cereals Ever Improve Kellogg's Health? - Analyst Blog

On Jun 20, we issued an updated research report on Kellogg Company K.

On May 1, the global snacks and cereal company reported disappointing first-quarter 2014 results as the U.S. cereal sales remained soft and international results weakened from last quarter. Though first-quarter adjusted earnings of $1.01 per share beat the Zacks Consensus Estimate, it declined 1% year over year due to weak revenues and profits. Revenues declined 3.1% in the quarter once again due to choppy cereal sales.

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 such as yogurt, eggs, bread and peanut butter is hurting category growth. Though the company is trying to reinvigorate this segment through innovation and aggressive marketing campaigns, these activities are yet to show results. More recently, the company witnessed cereal category weakness in other developed countries like the U.K., Canada and Australia.

However, Kellogg has strong fundamentals with its solid brand positioning, geographic diversity and significant investments behind innovation, marketing and supply-chain initiatives. We are also encouraged by the growth potential, diversification and international presence that the Pringles deal provides. Pringles, acquired by Kellogg in Jun 2012 from The Procter & Gamble Company PG, has performed quite well. Sales and profit in the business have exceeded management's expectations in every quarter since the transaction closed.

Moreover, brand building investments and cost saving programs are expected to build as the year unfolds which management believes will benefit organic sales.

Nevertheless, our expectations for sales acceleration are muted as the cereal category continues to contract. Moreover, even though the new cost savings plan, Project K, will free up funds for brand building, innovation and overall growth, it would take a couple of years before delivering substantial results.

Another company that is being pressured by its cereals business is General Mills, Inc. GIS. General Mills' cereal sales declined 2% in fiscal 2013 due to weak category growth.

Other Stocks to Consider

Kellogg currently carries a Zacks Rank #3 (Hold). A better-ranked food stock is The Hain Celestial Group Inc. HAIN which sports a Zacks Rank #1 (Strong Buy).