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Kellogg (K) Down 2.9% Since Earnings Report: Can It Rebound?
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It has been about a month since the last earnings report for Kellogg Company (K - Free Report) . Shares have lost about 2.9% in that time frame, underperforming the market.
Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Kellogg Beats on Q4 Earnings, Issues 2017 Guidance
Earnings Beat
Fourth-quarter adjusted earnings of $0.92 per share beat the Zacks Consensus Estimate of $0.85 by 8.2%. Earnings grew 16.5% year over year on profit margin expansion across all regions that offset the negative impact of currency translation.
Excluding currency headwinds of $0.07 (mostly from the Venezuela business), earnings increased 25.3% year over year.
Adjusted earnings exclude costs associated with Project K, a mark-to-market loss and certain other items. Including these items, however, the company reported loss of $0.15 per share, wider than year-ago loss of $0.12.
Full-year adjusted earnings came in at $3.74 per share versus $3.53 a year ago. Excluding currency headwinds of $0.57, earnings increased 22.1% year over year.
Revenues Almost in Line
Kellogg reported revenues of $3.097 billion, down 1.4% year over year, marking the eighth straight quarter of revenue decline. Significant currency headwind resulted in the underperformance. Revenues were almost in line with the Zacks Consensus Estimate of $3.10 billion.
Currency hurt sales by 2.5% in the quarter. Acquisitions and dispositions had a neutral impact on revenues. Accordingly, organic revenues (excluding the impact of acquisitions, dispositions and foreign exchange) grew 1.1% as against a 1% decline in the previous quarter. The upside can be attributed to improvement across all regions, barring Europe. Excluding Venezuela, organic sales growth was 0.5%.
Volumes grew 0.8%, better than the 1.8% drop in the preceding quarter. On the other hand, price/mix added 0.7% to sales, lower than the 0.8% contribution in the last quarter.
2016 revenues came in at $13.01 billion, down 3.8% year over year.
Profits Rise
Kellogg’s adjusted operating profit grew 12.3% to $494 million, partly hit by currency headwinds of 3.5%. Profits improved across all the regions, except Asia Pacific.
However, excluding currency impact, adjusted operating profit increased approximately 16.7% on strong Project K cost savings.
Segment Discussion
North America: Kellogg’s North America sales inched up 0.5% (up 0.4% organically) year over year to $2.13 billion, driven by growth in U.S. Snacks and U.S. Specialty Channels. The upside in organic revenues was better than a 2.3% drop in the previous quarter. Volumes grew 0.5%, as compared with a 1.9% decrease in the previous quarter. Price/mix was down 0.1% as compared with a 0.4% drop in the previous quarter. Adjusted operating profit rose 16.3% organically in North America.
North America Business by Segment
U.S. Morning Foods: Revenues slipped 1.1% to $704 million. Organic sales also declined 1.1%, better than the 3.8% decline in the previous quarter.
Drinks and non-core products drove the pullback; cereal share was flat for the quarter but the six core brands increased share by 20 bps in the quarter.
Segment operating margin was 20.7%, up 490 bps.
U.S. Snacks: This segment improved 2.3% (also organically) to $767 million. The upside was driven by “Big Three” crackers brands Cheez-It, Club, and Town House that helped the cracker business gain traction in the quarter. This was slightly offset by moderating share losses in the cookies business. Wholesome Snacks also gained share in the quarter on the back of Rice Krispies and Nutri-Grain, while Pringles consumption grew despite some SKU adjustments.
Operating margin improved 90 bps year over year to 14.1%.
U.S. Specialty: This segment’s sales rose 5.2% (5.1% organically) to $283 million. The segment delivered the sixth consecutive quarter of year-over-year sales and margin growth. Share gains spanned cereal, crackers and wholesome snacks in the food service channel, and cereal, crackers, and frozen breakfast in the convenience store channel. Operating margin of 24.4% was up 130 bps year over year.
North America Other (U.S. Frozen, Kashi and Canada): Segment revenues of $376 million declined 3.3%. Organically, it decreased 3.6%.
Operating was 17.3%, up 170 bps year over year.
Europe: Segment revenues of $556 million declined 9.1% due to currency headwinds of 8.5%. Organically, sales were 1.1% down in the fourth quarter as against a 1.4% drop seen in the last quarter. Organic operating profit improved 8.3% in Europe.
Latin America: Segment revenues of $187 million declined by $3 million due to currency headwinds. Organic operating profit increased 27% in Latin America.
Asia Pacific: Segment revenues of $224 million improved 1.8% led by strong growth across the region for Pringles. Organically, sales increased 1.2%. Organic operating profit dropped 1% in the Asia Pacific.
Financial Details
As on Dec 31, 2016, cash and cash equivalents were $280 million, up from $250 million as of Jan 2, 2016.
In 2016, operating cash flow after capex was $1,121 million, down from $1,138 million a year ago. Capital expenditure was $507 million versus $553 million a year ago.
In 2016, the company bought back 6 million shares worth approximately $426 million versus 11 million worth $731 million a year ago.
2017 Guidance
The company expects revenues to decline by about 2% on a currency-neutral comparable basis.
The company now expects adjusted constant currency earnings (including the impact of Venezuela) in the range of $4.03–$4.09 per share.
However, including currency impact, adjusted EPS guidance is now forecasted between $3.91 and $3.97.
Adjusted constant currency operating profit growth projection was maintained in the range of 7–9%. Operating margin is expected to improve by more than a full percentage point, well on track to achieve its goal of 350 bps of expansion from 2015 through 2018.
2017-2018 Outlook
During 2016-2018, adjusted profit margin is expected to increase by approximately 350 basis points from 2015 levels, reaching approximately 18% by 2018. This is two years earlier than expected previously driven by the expansion of ZBB initiative in North America and internationally along with stronger price realization via better revenue growth management. Kellogg previously expected to reach a 17%–18% profit margin by 2020.
As the company increases focus on margin expansion, adjusted currency-neutral sales growth is expected to be approximately flat in 2017-2018.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed a downward trend in fresh estimates. There has been one revision lower for the current quarter.
At this time, Kellogg's stock has a strong Growth Score of 'A', though it is lagging a bit on the momentum front with a 'C'. Charting a exactly similar path, the stock was allocated a grade of 'C' on the value side, putting it in the middle 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.
Our style scores indicate that the stock is more suitable for growth investors than value and momentum investors.
Outlook
While estimates have been broadly trending downward for the stock, the magnitude of these revisions is net zero. Notably, the stock has a Zacks Rank #3 (Hold). We are looking for an inline return from the stock in the next few months.
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Kellogg (K) Down 2.9% Since Earnings Report: Can It Rebound?
It has been about a month since the last earnings report for Kellogg Company (K - Free Report) . Shares have lost about 2.9% in that time frame, underperforming the market.
Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Kellogg Beats on Q4 Earnings, Issues 2017 Guidance
Earnings Beat
Fourth-quarter adjusted earnings of $0.92 per share beat the Zacks Consensus Estimate of $0.85 by 8.2%. Earnings grew 16.5% year over year on profit margin expansion across all regions that offset the negative impact of currency translation.
Excluding currency headwinds of $0.07 (mostly from the Venezuela business), earnings increased 25.3% year over year.
Adjusted earnings exclude costs associated with Project K, a mark-to-market loss and certain other items. Including these items, however, the company reported loss of $0.15 per share, wider than year-ago loss of $0.12.
Full-year adjusted earnings came in at $3.74 per share versus $3.53 a year ago. Excluding currency headwinds of $0.57, earnings increased 22.1% year over year.
Revenues Almost in Line
Kellogg reported revenues of $3.097 billion, down 1.4% year over year, marking the eighth straight quarter of revenue decline. Significant currency headwind resulted in the underperformance. Revenues were almost in line with the Zacks Consensus Estimate of $3.10 billion.
Currency hurt sales by 2.5% in the quarter. Acquisitions and dispositions had a neutral impact on revenues. Accordingly, organic revenues (excluding the impact of acquisitions, dispositions and foreign exchange) grew 1.1% as against a 1% decline in the previous quarter. The upside can be attributed to improvement across all regions, barring Europe. Excluding Venezuela, organic sales growth was 0.5%.
Volumes grew 0.8%, better than the 1.8% drop in the preceding quarter. On the other hand, price/mix added 0.7% to sales, lower than the 0.8% contribution in the last quarter.
2016 revenues came in at $13.01 billion, down 3.8% year over year.
Profits Rise
Kellogg’s adjusted operating profit grew 12.3% to $494 million, partly hit by currency headwinds of 3.5%. Profits improved across all the regions, except Asia Pacific.
However, excluding currency impact, adjusted operating profit increased approximately 16.7% on strong Project K cost savings.
Segment Discussion
North America: Kellogg’s North America sales inched up 0.5% (up 0.4% organically) year over year to $2.13 billion, driven by growth in U.S. Snacks and U.S. Specialty Channels. The upside in organic revenues was better than a 2.3% drop in the previous quarter. Volumes grew 0.5%, as compared with a 1.9% decrease in the previous quarter. Price/mix was down 0.1% as compared with a 0.4% drop in the previous quarter. Adjusted operating profit rose 16.3% organically in North America.
North America Business by Segment
U.S. Morning Foods: Revenues slipped 1.1% to $704 million. Organic sales also declined 1.1%, better than the 3.8% decline in the previous quarter.
Drinks and non-core products drove the pullback; cereal share was flat for the quarter but the six core brands increased share by 20 bps in the quarter.
Segment operating margin was 20.7%, up 490 bps.
U.S. Snacks: This segment improved 2.3% (also organically) to $767 million. The upside was driven by “Big Three” crackers brands Cheez-It, Club, and Town House that helped the cracker business gain traction in the quarter. This was slightly offset by moderating share losses in the cookies business. Wholesome Snacks also gained share in the quarter on the back of Rice Krispies and Nutri-Grain, while Pringles consumption grew despite some SKU adjustments.
Operating margin improved 90 bps year over year to 14.1%.
U.S. Specialty: This segment’s sales rose 5.2% (5.1% organically) to $283 million. The segment delivered the sixth consecutive quarter of year-over-year sales and margin growth. Share gains spanned cereal, crackers and wholesome snacks in the food service channel, and cereal, crackers, and frozen breakfast in the convenience store channel. Operating margin of 24.4% was up 130 bps year over year.
North America Other (U.S. Frozen, Kashi and Canada): Segment revenues of $376 million declined 3.3%. Organically, it decreased 3.6%.
Operating was 17.3%, up 170 bps year over year.
Europe: Segment revenues of $556 million declined 9.1% due to currency headwinds of 8.5%. Organically, sales were 1.1% down in the fourth quarter as against a 1.4% drop seen in the last quarter. Organic operating profit improved 8.3% in Europe.
Latin America: Segment revenues of $187 million declined by $3 million due to currency headwinds. Organic operating profit increased 27% in Latin America.
Asia Pacific: Segment revenues of $224 million improved 1.8% led by strong growth across the region for Pringles. Organically, sales increased 1.2%. Organic operating profit dropped 1% in the Asia Pacific.
Financial Details
As on Dec 31, 2016, cash and cash equivalents were $280 million, up from $250 million as of Jan 2, 2016.
In 2016, operating cash flow after capex was $1,121 million, down from $1,138 million a year ago. Capital expenditure was $507 million versus $553 million a year ago.
In 2016, the company bought back 6 million shares worth approximately $426 million versus 11 million worth $731 million a year ago.
2017 Guidance
The company expects revenues to decline by about 2% on a currency-neutral comparable basis.
The company now expects adjusted constant currency earnings (including the impact of Venezuela) in the range of $4.03–$4.09 per share.
However, including currency impact, adjusted EPS guidance is now forecasted between $3.91 and $3.97.
Adjusted constant currency operating profit growth projection was maintained in the range of 7–9%. Operating margin is expected to improve by more than a full percentage point, well on track to achieve its goal of 350 bps of expansion from 2015 through 2018.
2017-2018 Outlook
During 2016-2018, adjusted profit margin is expected to increase by approximately 350 basis points from 2015 levels, reaching approximately 18% by 2018. This is two years earlier than expected previously driven by the expansion of ZBB initiative in North America and internationally along with stronger price realization via better revenue growth management. Kellogg previously expected to reach a 17%–18% profit margin by 2020.
As the company increases focus on margin expansion, adjusted currency-neutral sales growth is expected to be approximately flat in 2017-2018.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed a downward trend in fresh estimates. There has been one revision lower for the current quarter.
Kellogg Company Price and Consensus
Kellogg Company Price and Consensus | Kellogg Company Quote
VGM Scores
At this time, Kellogg's stock has a strong Growth Score of 'A', though it is lagging a bit on the momentum front with a 'C'. Charting a exactly similar path, the stock was allocated a grade of 'C' on the value side, putting it in the middle 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.
Our style scores indicate that the stock is more suitable for growth investors than value and momentum investors.
Outlook
While estimates have been broadly trending downward for the stock, the magnitude of these revisions is net zero. Notably, the stock has a Zacks Rank #3 (Hold). We are looking for an inline return from the stock in the next few months.