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Kellogg (K) Q3 Earnings: Project K & Buyouts Boost Prospects

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Kellogg Company (K - Free Report) is set to report third-quarter 2018 results on Oct 31, before the opening bell. In the last reported quarter, the company’s earnings beat the Zacks Consensus Estimate by roughly 8.6%. In fact, the bottom line surpassed expectations in 13 of the trailing 14 quarters. Earnings have also registered year-on-year growth in the last eight quarters. Moreover, the top line surpassed estimates and improved year on year in the past four quarters.

Let’s see how things are shaping up prior to the upcoming quarterly announcement and discuss if the company can sustain robust performance trend.

Savings & Brand Augmenting Efforts to Aid Results

Strategic buyouts have enabled Kellogg to augment portfolio strength and enhance revenue generation capabilities. In line with the strategy, the company acquired protein bar maker, Chicago Bar Company, in 2017. Chicago Bar Company produces RXBAR, which is the fastest growing nutrition bar brand in the United States. Further, the company is gaining from the consolidation of Multipro, a Nigerian food distributor. We note that during second-quarter 2018, Kellogg’s revenue growth was primarily driven by the takeover of RXBAR and the consolidation of Multipro. Further, the company’s Pringles buyout is lucrative. The brand, which has been growing across the globe, sustained the momentum in second-quarter 2018 and registered strong growth in almost all regions. These businesses are expected to continue driving performance and boost the top line in the impending quarter.

Apart from Kellogg, other food companies like McCormick (MKC - Free Report) and United Natural Foods (UNFI - Free Report) have been strengthening their portfolios and competitive positions through strategic acquisitions.  

Additionally, the company is also striving to augment offerings through innovation. Progressing along these lines, the company completely redesigned the Special K brand in the domestic market and re-positioned it as a healthy lifestyle brand to meet the change in consumers’ attitude from dieting to health and wellness. Apart from Kellogg, other food companies such General Mills (GIS - Free Report) have also been striving to bolster their organic offerings to tap consumers’ rising preference for such items.

Apart from efforts to strengthen offerings, the company has been trying to keep a lid on expenses. In this respect, the company is particularly striving toward reducing overhead costs pertaining to Direct-Store Delivery in U.S. Snacks. Further, savings from the four-year restructuring program — Project K — are being allocated toward brand-building initiatives, in-store execution, sales capabilities and innovation to stabilize sales. A portion of the Project K savings is also being invested to improve food quality. Additionally, savings from Project K are being utilized to boost manufacturing capacity and R&D resources in developing/emerging markets. That said, Kellogg expects $600–$700 million in Project K cost savings in 2019. Further, the company is on track with an aggressive zero-based budgeting (ZBB) program in its North American business to generate savings.

Kellogg Company Price, Consensus and EPS Surprise

 

 

Will Efforts Counter Weak Segments?

Kellogg’s mainstay U.S. cereal business has been performing poorly for a while. This is mainly due to lower demand for cereals due to competitive pressures from other breakfast alternatives. We note that revenues in the U.S. Morning Foods segment, which includes cereals, slipped 5.2% in 2017. Persistence of these factors along with softness in the U.S. Snacks business is likely to weigh on the company’s North American business in the upcoming quarterly release.

Nevertheless, we expect that management’s dedicated efforts to revive the cereals and snacks units through dedicated investments in innovation and better in-store execution will aid in the long run. Further, the company’s savings and revenue boosting efforts are expected to cushion these challenges. That said, let’s take a look at the picture unveiled by estimates and the Zacks Model for the third quarter.

Estimates Look Bright

Kellogg’s stellar past performance combined with well-chalked strategic endeavors have propelled management to provide a favorable view for 2018. This boosts optimism for the upcoming quarterly release. Incidentally, the Zacks Consensus Estimate for third-quarter earnings is currently pegged at $1.06, depicting a rise of almost 1% from the prior-year quarter’s figure. Additionally, the Zacks Consensus Estimate for net revenues is currently pegged at $3,409 million, indicating a rise of roughly 4.2% year over year.

Zacks Model

Our proven model shows that Kellogg is likely to beat estimates this quarter. A stock needs to have a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. You may uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Kellogg’s Earnings ESP of +1.01% combined with a Zacks Rank #3 make us reasonably confident of an earnings beat. You can see the complete list of today’s Zacks #1 Rank stocks here.

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