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Kellogg (K) Up 6.4% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Kellogg (K - Free Report) . Shares have added about 6.4% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Kellogg due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Kellogg Q4 Earnings Miss Estimates, Sales Increase Y/Y

Kellogg reported soft results for fourth-quarter 2020, as both earnings and sales fell short of the Zacks Consensus Estimate and the former declined year over year. Nonetheless, sales were up, with organic sales benefiting from growth in all regions.

Since the onset of the pandemic, Kellogg has performed well with regard to its priorities of focusing on the health and safety of its workers, helping communities and ensuring food supply to the marketplace. The company has undertaken considerable investments in this regard. Despite the pandemic-led uncertainty, the company offered 2021 view, which indicates growth on a two-year basis.

Quarter in Detail

Adjusted earnings of 86 cents per share dropped 5.5% year over year due to elevated expenses associated with debt redemption, partially offset by increased adjusted operating profit. On a constant currency or cc basis, adjusted earnings per share declined 6.6% to 85 cents. Also, the bottom line came below the Zacks Consensus Estimate of 90 cents.

The company delivered net sales of $3,464 million, which advanced 7.5% year on year, though it missed the consensus mark of $3,527 million. Net sales were aided by an additional week. Organic sales moved up 2.5% on the back of growth in all four regions.

Adjusted operating profit climbed 1.6% to $410 million, while the same rose 0.6% to $406 million at cc. The company’s reported operating profit was aided by increased sales, an extra week and reduced one-time charges, partly countered by high COVID-19 costs and a double-digit jump in advertising and consumer promotion investments.

Segment Discussion

Sales in the North America segment amounted to $1,894 million, which grew 7.5% year over year, backed by the inclusion of an extra week. Sales grew less than 1% on an organic basis, as sustained consumption gains in the retail channel were countered by unfavorable shipment timing in several categories as well as continued softness in the away-from-home channel. Adjusted operating profit increased about 6% at cc.

Revenues in the Europe segment totaled $526 million, up 15.4% year on year, courtesy of solid business momentum and the impact of the extra week in the fourth quarter. Further, sales rose more than 7% on an organic basis, on continued strength in cereal, which has been seeing increased demand amid the pandemic. Also, the snacks category reverted to growth and contributed to the upside. Adjusted operating profit grew approximately 11% at cc.

Revenues in Latin America totaled $233 million, down 1.7% year on year on account of currency headwinds and the absence of divested businesses. Sales grew roughly 10% on an organic basis on high cereal demand, along with robust growth at Pringles, in Brazil. Adjusted operating profit slumped about 55% at cc.    

Revenues in the Asia, the Middle East & Africa segment totaled $570 million, up 3.5% year over year. Sales were aided by the additional week as well as organic sales growth of more than 2%, somewhat negated by currency headwinds. Growth can be accountable to robust demand for cereal, growth in Pringles, and growth of noodles in the Middle East and Africa. These were partly negated by the pandemic-induced school closures in North Africa. Adjusted operating profit was up around 9% at cc.

Other Financials & Guidance

Kellogg ended the quarter with cash and cash equivalents of $435 million, long-term debt of $6,746 million and total equity of $3,636 million. In the year ended Jan 2, 2021, the company generated cash from operating activities of $1,986 million. Cash flow from operating activities is likely to be nearly $1.6 billion in 2021. Capital expenditures are expected to be around $0.5 billion. Consequently, cash flow is estimated to be roughly $1.1 billion.

The company said that it entered 2021 with robust momentum. It has improved its capabilities, reached new households, enhanced its financial flexibility and made supply-chain investments. The company, which is on solid footing, issued its 2021 view that does not include any major supply-chain or prolonged market disturbances associated with the pandemic.

Organic sales in 2021 are estimated to drop nearly 1% due to comparisons with an exceptionally solid pandemic-led growth in the year-ago period. This, however, implies a two-year compound annual increase of nearly 2.5%. Adjusted operating profit is expected to decline roughly 2% at cc, again due to tough year-over-year comparisons with the year-ago period that included robust coronavirus-led growth and an additional week. This implies a two-year compound annual increase of 3-4%. Adjusted earnings per share are expected to grow about 1% at cc. This indicates a two-year compound annual increase of 4-5%.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month.

VGM Scores

Currently, Kellogg has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Kellogg has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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