We expect Kellogg Company (KHC - Free Report) to beat expectations when it reports second-quarter 2017 results before the market opens on Aug 3. Last quarter, this cereal and snacks company delivered a positive earnings surprise of 4.95%. The company delivered a positive earnings surprise in the trailing four quarters, the average beat being 6.16%.
The chart below depicts the surprise history.
Why a Likely Positive Surprise?
Per our proven model, Kellogg has the right combination of two key ingredients — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — to be able to beat estimates.
Zacks ESP: The Most Accurate estimate stands at 94 cents per share, while the Zacks Consensus Estimate is pegged at 92 cents, resulting in an Earnings ESP of +2.17%. This is a meaningful indicator of a likely positive surprise. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Zacks Rank: Kellogg carries a Zacks Rank #2.
We caution against Sell-rated stocks (Zacks Rank #4 or 5) going into the earnings announcement, especially when the company is witnessing negative estimate revisions.
Factors at Play
The company has been witnessing top-line weakness for the last two years, primarily due to weak performance by its cereal products in developed markets, as well as soft U.S. snacks business, owing to lower demand.
Soft spending by U.S. shoppers along with rapid change in consumer preferences and behavior are hurting the company’s categories. Kellogg, like a number of other U.S. food producers, has been struggling due to the shift in consumer preference toward natural and organic ingredients over packaged and processed food. This trend is unlikely to change in the to-be-reported quarter.
Also, the company expects its sales in the European business to remain soft in the second quarter due to lower volumes, tough comparisons and currency headwinds. However, strong performance in Latin America and Asia is likely to compensate for the above headwinds.
Nonetheless, given the tepid sales growth, the company is making aggressive efforts toward improving its food offerings. In order to counter the sluggish sales trend, the company is investing in brand building, in-store capabilities along with product and packaging innovation.
Cost-savings initiatives like Project K and zero-based budgeting (ZBB) program are somewhat compensating for the weakness in sales. Although the top line has been weak, Kellogg’s margin growth has been impressive.
Overall, for the second quarter, the Zacks Consensus Estimate for earnings is pegged at 92 cents, reflecting a 1.6% year-over-year increase. Meanwhile, the consensus estimate for revenues is $3.15 billion, implying a 3.5% decline.
Stocks to Consider
Here are a few other companies in the Consumer Staple sector you may want to consider as our model shows that these also have the right combination of elements to post an earnings beat:
Church & Dwight Company, Inc. (CHD - Free Report) has an Earnings ESP of +2.56% and a Zacks Rank #3. The company is scheduled to report quarterly numbers on Aug 3.
The Clorox Company (CLX - Free Report) has an Earnings ESP of +0.67% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.
The company is scheduled to report quarterly numbers on Aug 3.
Coca-Cola European Partners PLC (CCE - Free Report) has an Earnings ESP of +4.69% and a Zacks Rank # 2. The company is scheduled to report quarterly numbers on Aug 10.
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