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Kellogg Beats Overall, Keeps 2013 View

K PG JJSF FLO

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Kellogg Company’s (K - Analyst Report) adjusted fourth quarter 2012 earnings of 67 cents per share beat the Zacks Consensus Estimate of 65 cents per share by 3.1%. The fourth-quarter earnings also beat the prior-year quarter earnings of 64 cents by 4.7%, driven by robust organic sales growth performance. Kellogg re-affirmed its 2013 outlook.

Adjusted earnings exclude integration costs related to the Pringles acquisition, mark to market gains, and impact of accounting changes for pensions and post-retirement plans. Including these charges reported loss was 9 cents per share. Kellogg acquired the Pringles snack business from consumer giant, Procter & Gamble (PG - Analyst Report) in June last year.

We were expecting a positive earnings beat this quarter from Kellogg as the stock had the impressive combination of Zacks Rank #2 (Buy) and +6.15% ESP (Expected Surprise Prediction) (Read: Zacks Earnings ESP: A Better Method).

Revenue & Margins

The world’s largest cereal maker reported revenue of $3.56 billion in the quarter, up 18.2% year over year driven by a balanced growth in volume and price. Volumes added 2.6% while price/mix added 2.7% to sales growth. Revenues beat the Zacks Consensus Estimate of $3.44 billion.

Acquisitions added 13.0% to top-line growth. Currency added 0.2% to revenue growth, much better than its negative impact in the past few quarters. Accordingly, organic revenue growth (excluding impact of acquisitions, dispositions and foreign exchange) was 5.3%.

Improving volume trends in North America, significant growth in Latin America, some improvement in Europe and strong performance of its Pringles business drove the top-line growth in the quarter.

Kellogg’s adjusted operating profit declined 7.6%, higher than company expectations of a decline of 4%-6%. Commodity cost inflation, upfront costs in Australia, and double digit increase in brand building investments led to the operating profit decline.

Segment Discussion

Most of the business segments delivered decent year-over-year revenue growth in the quarter.

North American Business: Kellogg North America’s sales increased 12.3% from the prior-year quarter to $2.31 billion in the fourth quarter. Organically, segment sales increased 5.5%.

The organic sales growth was driven by both price/mix and volume growth, gaining from improving business trends as well as increased brand support. Price/mix added 2.1% to revenue growth, while volumes grew an impressive 3.4%, much better than last quarter’s 0.5%.

Organically, the U.S. Morning Foods and Kashi business grew 6.3%, U.S. Specialty was up 10%, and North America Other segment was up 11.2%. However, the U.S. snacks business grew only 0.7% due to strong year ago comparisons.

Organically operating profit declined 1.6% organically to $348 million as sales growth was offset by high commodity inflation and increase in brand building investments.

International: Kellogg International sales improved 30.9% from the prior-year quarter. Organically, revenues improved 4.8%. Europe improved 2.7% organically, better than last quarter’s performance. Asia Pacific grew 4.6% organically while Latin America grew 9.4 % in the quarter.

Kellogg International's operating profit decreased 21.9% as growth in Latin America was offset by declines in Europe and Asia Pacific. Importantly, organic operating profit declined 72.3% in Asia pacific due to up-front costs associated with the closure of a plant in Australia, higher brand building investments and increased commodity costs inflation.

Annual Results

In fiscal 2012, the company witnessed a 7.6% increase in revenues to $14.20 billion, marginally beating the Zacks Consensus Estimate of $14.07 billion. Organically, revenue grew 2.5%, within the company’s guidance range of 2%-3% growth.

Adjusted earnings were $3.37 per share, which also beat the Zacks Consensus Estimate of $3.33. Adjusted earnings were almost flat from the year ago levels. Including the impact from Pringles and product recall costs, earnings were $3.28, near the higher end of the company’s guidance range of $3.18 and $3.30.

2013 Guidance

Kellogg maintained its previously provided outlook for 2013. For 2013, Kellogg expects net sales growth to be approximately 7%, while reported earnings (excluding impact of mark-to-market adjustments but including Pringles integration costs) are expected to grow between 5% and 7%. Reported operating profit ((excluding impact of mark-to-market adjustments) is expected to increase at a higher rate than earnings growth.

Other Stocks to Consider

Kellogg carries a Zacks Rank #2 (Buy) but is not the only bullish firm this earnings season. We also see likely earnings beats coming from the following industry peers:

J&J Snack Foods Corp. (JJSF - Snapshot Report): Earnings ESP of +5.0% and Zacks Rank #1 (Strong Buy).

Flowers Foods, Inc. (FLO - Snapshot Report): Earnings ESP of +4.0% and Zacks Rank #1 (Strong Buy).

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