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On Mar 20, we maintained a Neutral recommendation on cereal and snack company, Kellogg Company (K - Analyst Report), following appraisal of its fourth-quarter results.

Why the Neutral Recommendation?

On Feb 5, 2013, Kellogg announced its fourth-quarter 2012 results. Fourth-quarter 2012 earnings of 67 cents per share beat the Zacks Consensus Estimate by 3.1% and prior-year quarter earnings by 4.7% driven by robust organic sales growth performance. Revenue grew 18.2% to $3.56 billion in the quarter, driven largely by volume growth while pricing improved. Revenue rose 5.3% organically, driven by improving volume trends in North America, significant growth in Latin America, some improvement in Europe and strong performance of its Pringles business. Kellogg maintained its outlook for 2013.

Following solid second-quarter results, estimates largely moved upward over the past 60 days. The Zacks Consensus Estimate for 2013 went up a 5.2% to $3.85 while that for 2014 increased 2.5% to $4.12 over the last 60 days. Accordingly, Kellogg carries a Zacks Rank #2 (Buy). In fact the company has delivered positive earnings surprises in all the past 4 quarters.

We are optimistic about Kellogg’s solid brand positioning, its geographic diversity and significant investments behind innovation, marketing and supply-chain initiatives. Moreover, we are encouraged by the growth potential, diversification and international presence that the Pringles deal provides.

However, the challenged cereal business, pressures in Europe and rising input costs keep us on the sidelines. Kellogg’s mainstay U.S. cereal business has been challenging. Though improving trends have been noticed recently, we would like to see a broader based and sustained growth in the category. Overall, the European business remained sluggish in 2012, though some improvement was seen in the second half. The region continues to face difficult economic conditions and competitive activity. Management believes a substantial improvement in Europe will take time.

Other Stocks to Consider

Other stocks in the food industry that are currently performing well and have a bright outlook include J&J Snack Foods Corp. (JJSF - Snapshot Report) – Zacks Rank #1 (Strong Buy) and ConAgra Foods, Inc. (CAG - Analyst Report) and Flowers Foods, Inc. (FLO - Snapshot Report) – Zacks Rank #2 (Buy).

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