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Kellogg (K) Q4 Earnings: What's in Store for the Stock?

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Kellogg Company (K - Free Report) is set to report fourth-quarter 2017 results on Feb 8 before the opening bell. Last quarter, the company delivered a positive earnings surprise of 12.9%. It also surpassed expectations in each of the trailing four quarters, the average beat being 7.88%.

Let’s see, how things are shaping up prior to this announcement.

Kellogg has missed analysts’ expectations on sales in five of the past 10 quarters. The company has been witnessing top-line weakness for the last couple of years, primarily due to lower demand. Particularly, sluggish performance of its cereal products in the developed markets as well as a soft U.S. snacks business has been affecting the company.

Segment Discussion: Per the Zacks Consensus Estimate, Kellogg’s Total North America segment’s revenues (comprising 68% of the Kellogg’s total revenues) are expected to witness a 3.2% decline in the fourth quarter. Kellogg’s mainstay U.S. cereal business has been performing poorly since 2012 due to disappointing category growth. Precisely, its adult category has been a drag, adversely impacting its overall sales growth.

Revenues at the U.S. Morning Foods segment including cereals dipped 5.3% in the first nine months of 2017. The metric at the U.S. Morning Foods segment is also anticipated to decline 3.4% in the to-be-reported quarter.

Again, the U.S. snacks business has been struggling since 2013 on low volumes. Kellogg’s transition from a Direct Store Delivery system to warehouse distribution in its U.S. Snacking business is on track with shipping fully transitioned to warehouses in July 2017. This shift remains a headwind to sales of late as the company rationalizes SKUs and resets pricing to customers. The U.S. snacks business revenues are estimated to decline 8.1% year over year to $705 million in the fourth quarter.

Nonetheless, given the tepid sales growth, the company is making aggressive efforts toward improving its food offerings. It is investing in brand building, in-store capabilities plus product and packaging innovation. Again, the company’s sales in Brazil are likely to benefit from the Parati acquisition. The metric is also predicted to gain from the improved performance of Pringles in Europe.

Europe revenues are likely to witness a 2.7% decline. However, Latin America as well as Asia Pacific revenues are expected to register a respective 20.9% and 3.6% rise in the quarter.

Kellogg, much like a number of other U.S. food producers namely General Mills Inc. (GIS - Free Report) , The Kraft Heinz Company (KHC - Free Report) and Mondelez International, Inc. (MDLZ - Free Report) , has been struggling due to shift in consumer preference toward natural and organic ingredients over packaged and processed food. This trend is unlikely to change in the soon-to-be-reported quarter and Kellogg expects its top line to remain subdued in 2017, declining 3% from the level in 2016 on a currency-neutral comparable basis.

The Zacks Consensus Estimate for total fourth-quarter revenues is pegged at $3.1 billion, implying 0.4% growth.

Let as delve deeper into other factors likely to impact Kellogg’s fourth-quarter performance:

Cost-savings initiatives like Project K and zero-based budgeting program are somewhat compensating for the sales decline. Although the top line has been discouraging, Kellogg’s margin growth has been impressive. Pricing and mix improvement is anticipated to lend support to the company’s bottom-line growth. Currency headwinds are also likely to subside, further supporting EPS growth.

The Zacks Consensus Estimate for fourth-quarter earnings is pegged at 96 cents, reflecting a 4.4% year-over-year increase.

Kellogg Company Price and EPS Surprise

 

Kellogg Company Price and EPS Surprise | Kellogg Company Quote

 

Here is what our quantitative model predicts:

Kellogg does not have the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — to increase the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks ESP:  Kellogg has an Earnings ESP of -0.26%.

Zacks Rank: Kellogg carries a Zacks Rank of 3, which increases the predictive power of ESP. However, we also need to have a positive ESP to be confident about an earnings surprise.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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