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Why Is Kellogg (K) Up 7.9% Since Its Last Earnings Report?
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It has been about a month since the last earnings report for Kellogg Company (K - Free Report) . Shares have added about 7.9% in that time frame.
Will the recent positive trend continue leading up to its next earnings release, or is K due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Fourth-Quarter 2017 Results
Earnings In Line
Fourth-quarter comparable earnings of 96 cents per share came in line with the Zacks Consensus Estimate. The bottom line increased 5.5% year over year banking on higher operating profit and lower restructuring charges.
Revenues Beat
Kellogg reported revenues of $3.21 billion, increasing 3.6% year over year. The upside can be primarily attributed to the December 2016 acquisition of Parati in Brazil and October 2017 takeover of RXBAR along with favorable currency translation. The top line outpaced the consensus mark of $3.11 billion by 3.2%.
Currency and acquisitions had a 2% and 2.9% positive impact on revenues in the quarter. However, Venezuela deconsolidation had a 0.3% negative impact on the top line. Accordingly, organic revenues (excluding the impact of acquisitions, dispositions and foreign exchange) were down 1.5% compared with a 1.4% decline in the previous quarter. Except Europe and Asia Pacific, organic sales decreased across all other regions.
Volumes remained unchanged from the year ago period, a shade better than the 1.6% decrease in the preceding quarter. Meanwhile, price/mix had a 1.5% adverse impact on sales against the 0.2% positive contribution last quarter.
Profits Rise
Kellogg’s operating margin (currency-neutral comparable growth) was 17.6%, reflecting an improvement of 280 basis points (bps) year over year, as the company benefitted from strong productivity savings related to the Project K restructuring program, particularly this year's exit from its U.S. Snacks segment's Direct Store Delivery (DSD) system and its related elimination of overhead during the quarter.
Comparable operating profit grew 18.3% year over year in the quarter to $568 million.
Segment Discussion
Total North America: Kellogg’s North America sales declined 1.7% (3.3% organically) year over year to $2.1 billion due to the impacts related to the transition out of DSD in the U.S. Snacks business as well as continued consumption softness in U.S. cereal business (particularly in the health and wellness segment). Volumes decreased 0.7% compared with a decline of 1% in the previous quarter. Price/mix was down 2.6% compared with 0.9% decline in the prior quarter. Adjusted (comparable) operating profit also slipped 0.8% in the segment.
North America Business by Segment
U.S. Morning Foods: Revenues slipped 4.9% to $670 million. The downside was mainly due to the weakness in cereal category, particularly in the health and wellness segment.
U.S. Snacks: Net sales in this segment declined 5.8% from the year-ago level to $723 million. This was due to the discontinued shipping through its DSD distribution system, reducing workforce, and exiting leases for its distribution centers, trucks, and other equipment and SKU rationalization.
U.S. Specialty: This segment’s sales rose 2.1% to $288 million given the strength in the convenience and foodservice channels.
North America Other (U.S. Frozen, Kashi and Canada): Segment revenues of $412 million grew 9.6%. The upside was due to the positive contribution from the U.S. Frozen Foods. Frozen Foods' sales growth ramped up in the quarter, with strong consumption and share performance for both Eggo and Morningstar Farms, each driven by innovation and favorable category dynamics. Canada also witnessed sales growth, with increased share in both cereal and Pringles. Kashi posted continued consumption and share growth in cereal, led by its Bear Naked granola brand.
Europe: Segment revenues of $614 million improved 10.4% and currency had a 7.4% positive impact on the same. Organically, sales were up 3% in the fourth quarter compared with 0.1% growth last quarter. Adjusted operating profit improved 0.8% as well.
Latin America: Segment revenues of $259 million improved 38.1% (organically, revenues were up 0.5%). However, price/mix and volume had a 0.1% and 0.4% negative impact on sales while currency had a 2.4% positive impact. Acquisitions also had a 32.9% positive impact on revenues. Adjusted operating profit grew 0.9% in Latin America.
Asia Pacific: Segment revenues of $243 million improved 8.1% on the back of strong growth across the region for both cereal and snacks. Organically, sales increased 4.3%, better than 2.9% growth in the previous quarter. While volumes increased 4.4%, price/mix had a negative impact of 0.1% on sales. Adjusted operating profit improved 9.9% in the Asia Pacific.
2018 Views
Kellogg’s expects revenues to remain flat on a currency-neutral basis for 2018. It also anticipates adjusted earnings to grow in the range of 9-11% on constant currency.
Adjusted constant-currency operating profit growth is projected in the range of 4-6%. Cash from operating activities is expected to increase in the band of $1.7-1.8 billion for 2018 driven by higher net income, sustained working-capital improvement and benefits from U.S. Tax Reform.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimate. There have been two revisions higher for the current quarter compared to three lower.
At this time, K has an average Growth Score of C, though it is lagging a bit on the momentum front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Zacks' style scores indicate that the company's stock is suitable for value and growth investors.
Outlook
Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. Interestingly, K has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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Why Is Kellogg (K) Up 7.9% Since Its Last Earnings Report?
It has been about a month since the last earnings report for Kellogg Company (K - Free Report) . Shares have added about 7.9% in that time frame.
Will the recent positive trend continue leading up to its next earnings release, or is K due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Fourth-Quarter 2017 Results
Earnings In Line
Fourth-quarter comparable earnings of 96 cents per share came in line with the Zacks Consensus Estimate. The bottom line increased 5.5% year over year banking on higher operating profit and lower restructuring charges.
Revenues Beat
Kellogg reported revenues of $3.21 billion, increasing 3.6% year over year. The upside can be primarily attributed to the December 2016 acquisition of Parati in Brazil and October 2017 takeover of RXBAR along with favorable currency translation. The top line outpaced the consensus mark of $3.11 billion by 3.2%.
Currency and acquisitions had a 2% and 2.9% positive impact on revenues in the quarter. However, Venezuela deconsolidation had a 0.3% negative impact on the top line. Accordingly, organic revenues (excluding the impact of acquisitions, dispositions and foreign exchange) were down 1.5% compared with a 1.4% decline in the previous quarter. Except Europe and Asia Pacific, organic sales decreased across all other regions.
Volumes remained unchanged from the year ago period, a shade better than the 1.6% decrease in the preceding quarter. Meanwhile, price/mix had a 1.5% adverse impact on sales against the 0.2% positive contribution last quarter.
Profits Rise
Kellogg’s operating margin (currency-neutral comparable growth) was 17.6%, reflecting an improvement of 280 basis points (bps) year over year, as the company benefitted from strong productivity savings related to the Project K restructuring program, particularly this year's exit from its U.S. Snacks segment's Direct Store Delivery (DSD) system and its related elimination of overhead during the quarter.
Comparable operating profit grew 18.3% year over year in the quarter to $568 million.
Segment Discussion
Total North America: Kellogg’s North America sales declined 1.7% (3.3% organically) year over year to $2.1 billion due to the impacts related to the transition out of DSD in the U.S. Snacks business as well as continued consumption softness in U.S. cereal business (particularly in the health and wellness segment). Volumes decreased 0.7% compared with a decline of 1% in the previous quarter. Price/mix was down 2.6% compared with 0.9% decline in the prior quarter. Adjusted (comparable) operating profit also slipped 0.8% in the segment.
North America Business by Segment
U.S. Morning Foods: Revenues slipped 4.9% to $670 million. The downside was mainly due to the weakness in cereal category, particularly in the health and wellness segment.
U.S. Snacks: Net sales in this segment declined 5.8% from the year-ago level to $723 million. This was due to the discontinued shipping through its DSD distribution system, reducing workforce, and exiting leases for its distribution centers, trucks, and other equipment and SKU rationalization.
U.S. Specialty: This segment’s sales rose 2.1% to $288 million given the strength in the convenience and foodservice channels.
North America Other (U.S. Frozen, Kashi and Canada): Segment revenues of $412 million grew 9.6%. The upside was due to the positive contribution from the U.S. Frozen Foods. Frozen Foods' sales growth ramped up in the quarter, with strong consumption and share performance for both Eggo and Morningstar Farms, each driven by innovation and favorable category dynamics. Canada also witnessed sales growth, with increased share in both cereal and Pringles. Kashi posted continued consumption and share growth in cereal, led by its Bear Naked granola brand.
Europe: Segment revenues of $614 million improved 10.4% and currency had a 7.4% positive impact on the same. Organically, sales were up 3% in the fourth quarter compared with 0.1% growth last quarter. Adjusted operating profit improved 0.8% as well.
Latin America: Segment revenues of $259 million improved 38.1% (organically, revenues were up 0.5%). However, price/mix and volume had a 0.1% and 0.4% negative impact on sales while currency had a 2.4% positive impact. Acquisitions also had a 32.9% positive impact on revenues. Adjusted operating profit grew 0.9% in Latin America.
Asia Pacific: Segment revenues of $243 million improved 8.1% on the back of strong growth across the region for both cereal and snacks. Organically, sales increased 4.3%, better than 2.9% growth in the previous quarter. While volumes increased 4.4%, price/mix had a negative impact of 0.1% on sales. Adjusted operating profit improved 9.9% in the Asia Pacific.
2018 Views
Kellogg’s expects revenues to remain flat on a currency-neutral basis for 2018. It also anticipates adjusted earnings to grow in the range of 9-11% on constant currency.
Adjusted constant-currency operating profit growth is projected in the range of 4-6%. Cash from operating activities is expected to increase in the band of $1.7-1.8 billion for 2018 driven by higher net income, sustained working-capital improvement and benefits from U.S. Tax Reform.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimate. There have been two revisions higher for the current quarter compared to three lower.
Kellogg Company Price and Consensus
Kellogg Company Price and Consensus | Kellogg Company Quote
VGM Scores
At this time, K has an average Growth Score of C, though it is lagging a bit on the momentum front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Zacks' style scores indicate that the company's stock is suitable for value and growth investors.
Outlook
Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. Interestingly, K has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.