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The Kellogg Company (K - Analyst Report) recently reaffirmed its earnings guidance for 2012despite incurring charges for the recent recall of certain packages of Mini-Wheats cereal. The costs for the recall, which are expected to range between $20 million and $30 million, will be recorded in the third quarter. Management mentioned that strong performance of its Pringles business, acquired from Procter & Gamble (PG - Analyst Report) in June this year, will offset the headwinds due to this recall.

The 2012 earnings guidance ranges between $3.18 and 3.30. At the second quarter conference call, Kellogg’s management had provided a detailed financial outlook for 2012. Despite the not-so-great second quarter results, Kellogg expects the second half of the year to see better revenue and profit growth. Second half growth is expected to benefit from its brand building investments, increased contribution from innovation and the addition of Pringles.

Organic net sales growth is expected to range between 2% and 3% in 2012. Price/mix is expected to be a tailwind, while volumes will decline. Management expects product innovation to generate revenue of $900 million in 2012 compared to $800 million in 2011 and $600 million in 2010.

Gross margins are expected to be down less than 100 basis points in the quarter from 2011 levels, excluding Pringles. However, including Pringles, gross margins are expected to be down slightly more than 100 basis points. Operating profit for 2012 is expected to decline in the range of 2%–4%. The organic revenue and operating profit guidance excludes the impact from the Pringles acquisition.

Our Recommendation

We currently have a Neutral recommendation on Kellogg. The stock carries a Zacks #3 Rank (a short-term ‘Hold’ rating).

We are optimistic about Kellogg’s solid brand positioning, its geographic diversity and cost-saving efforts, especially its supply-chain initiatives. Moreover, we are encouraged by the growth potential, diversification and international presence that the Pringles deal provides. However, its sluggish cereal business, challenges in Europe and rising input costs keep us on the sidelines.

 

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