It has been about a month since the last earnings report for Kellogg Company (K - Free Report) . Shares have lost about 7% 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 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.
Second-Quarter 2017 Results
Kellogg's second-quarter comparable earnings of $0.97 per share beat the Zacks Consensus Estimate of $0.92 by 5.4%. Earnings increased 6.6% year over year banking on higher operating profit and a lower effective tax rate, which more than offset a higher level of restructuring charges.
Excluding currency headwinds of $0.01, earnings increased 7.7% 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 earnings of $0.80 per share, higher than the year-ago earnings of $0.79.
Kellogg reported revenues of $3.19 billion, down 2.5% year over year, marking the 10th straight quarter of revenue decline. The decline can be primarily attributed to weak consumer demand across most parts of the North American regions and Europe. Revenues surpassed the Zacks Consensus Estimate of $3.15 billion by 1.1%.
Currency hurt sales by 0.7% in the quarter. Acquisitions had a 1.5% positive impact on revenues. However, Venezuela deconsolidation had a 0.2% negative impact on the top line. Accordingly, organic revenues (excluding the impact of acquisitions, dispositions and foreign exchange) fell 3.1% compared with a 4.4% decline in the previous quarter. Except Asia Pacific, organic sales decreased across all other regions.
Volumes decreased 4.9%, a shade better than the 5.7% decrease in the preceding quarter. On the other hand, price/mix added 1.8% to sales, higher than the 1.3% contribution last quarter.
Kellogg’s operating margin (currency-neutral comparable growth) was 17.2%.
Comparable operating profit grew 5.9% to $538 million.
However, excluding the currency impact of 1%, adjusted (currency-neutral comparable) operating profit increased approximately 6.9% to $544 million on strong Project K and Zero-Based Budgeting cost savings.
Total North America: Kellogg’s North America sales declined 2.6% (down 2.4% organically) year over year to $2.15 billion, due to a shift in the consumer preference to healthier options from its processed food offerings. Volumes decreased 3.7% compared with 4.9% growth witnessed in the previous quarter. Price/mix increased 1.8% compared with a 0.5% growth in the prior quarter. Adjusted (currency-neutral comparable) operating profit increased 6.8% in North America.
North America Business by Segment
U.S. Morning Foods: Revenues slipped 6.6% to $679 million. Organic sales also declined 6.6%, almost in line with the 6.3% decline in the previous quarter.
U.S. Snacks: Net sales in this segment remained at par with the year ago level (also organically) to $803 million.
U.S. Specialty: This segment’s sales rose 1.8% (also organically) to $276 million.
North America Other (U.S. Frozen, Kashi and Canada): Segment revenues of $391 million declined 3.6%. Organically, it decreased 2.6%.
Europe: Segment revenues of $566 million declined 10% due to currency headwinds of 3.6%. Organically, sales were down 7% in the second quarter compared with a decline of 8.3% in the last quarter. Adjusted operating profit declined 1.1%.
Latin America: Segment revenues of $234 million improved 14.8% (organically, revenues were down 4%) owing to 3.4% price/mix growth. This was partly offset by a 7.4% decline in volume and 0.9% currency headwind. Adjusted operating profit decreased 14.6% in Latin America.
Asia Pacific: Segment revenues of $238 million improved 4.3% on the back of strong growth across the region for Pringles. Organically, sales increased 2.1%, softer than 2.9% growth in the last quarter. Adjusted operating profit improved 34.9% in the Asia Pacific. Volumes decreased 1.9%, while price/mix grew 4%, in the quarter.
2017 View Reaffirmed
The company expects revenues to decline about 3% on a currency-neutral comparable basis.
The company expects adjusted constant currency earnings to grow 8–10% in the range of $4.03–$4.09 per share.
The company now expects a $0.06 headwind from currency (down from $0.12), implying an adjusted EPS guidance range of $3.97 to $4.03 for 2017. Earlier, the company had expected EPS in the range of $3.91 to $3.97.
Adjusted constant currency operating profit growth projection was maintained in the range of 7–9%. Operating margin is expected to improve more than a full percentage point, and is on track to achieve its goal of 350 basis points expansion from 2015 through 2018.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates flatlined during the past month. There have been three revisions higher for the current quarter compared to three lower.
At this time, Kellogg's stock has a great Growth Score of A, a grade with the same score on the momentum front. However, 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 A. If you aren't focused on one strategy, this score is the one you should be interested in.
Based on our scores, the stock is equally suitable for growth and momentum investors.
Notably, the stock has a Zacks Rank #3 (Hold). We expect in-line returns from the stock in the next few months.