This Analyst Is Concerned Cereal's Losing Popularity Is Hurting Kellogg

• Kellogg Company K shares are up 11 percent in the last six months, even after hitting a low of $61.31 on June 3.
• Argus analyst John Staszak maintained a Hold rating on the company, while reducing the estimates for 2015 and 2016.
• Kellogg is facing a challenging operating environment in NA, with soft sales of cereals and snacks, Staszak said.

Analyst John Staszak expressed concern over the challenging operating environment in North America, where sales of cereals and snacks have been lackluster. He believes that sales could continue to disappoint in forthcoming quarters. While Kellogg invests in new products, this may result in marginal earnings growth.

Staszak commented, however, that Kellogg is poised to benefit over time from these new product launches as well as from supply-chain improvements.

In the report Argus noted, “With revenue and earnings significantly below their 2012 peaks, Kellogg is seeking to restore growth amid difficult industry conditions. Management is working to improve execution, reduce capacity, expand international sales, and implement Project K, but we think it will take time for these efforts to gain traction.”

Staszak expects Kellogg to report a 5.5 percent decline in its 2015 revenue to $13.8 billion, reflecting soft sales of cereals and snacks in the US. Management has guided to higher incentive compensation costs and brand-building investments, which would exert pressure on the company’s operating margin. The EPS estimated for 2015 and 2016 have been reduced from $3.56 to $3.50 and from $3.80 to $3.71, respectively.

"K shares appear fairly valued at current levels, with sales and earnings multiples that are above peer averages and near the top of the historical range. K shares appear fairly valued at current levels, with sales and earnings multiples that are above peer averages and near the top of the historical range," the analyst added.