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Why Kellogg (K) is an Attractive Pick for Investors Now

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The North American food industry has been witnessing sluggish growth and slowdown in consumption over the last few quarters, owing to changes in consumer preference toward natural and organic ingredients over packaged and processed food.

Nonetheless, one should not ideally overlook the sector as good food choices are healthy for ones' portfolio.

Kellogg Company (K - Free Report) is one of the food stocks that is a good investment choice. Shares of Kellogg have gained 2.3% in the last six months, comparing favorably with 6.4% decline of the industry it belongs to. It was backed by a solid earnings surprise history. The company surpassed expectations in each of the trailing four quarters, the average being 5.82%.

Meanwhile, the Zacks Consensus Estimate for earnings for both the first quarter and current year has increased 0.9% each, in the last 60 days, thus reflecting optimism in the stock’s prospects, and substantiating its Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.



 

What Makes Kellogg a Solid Pick?

Increased Focus on Brand Building: The company has been witnessing top-line weakness for the last two years, primarily due to lower demand. In order to improve its sales performance, the company is investing in brand building such as digital media, consumer promotions and traditional advertising. It is also investing in in-store capabilities like increasing sales forces of its struggling businesses — cereals and snacks.

Meanwhile, Kellogg’s transition from a Direct Store Delivery system to warehouse distribution in its U.S. Snacking business, started in July 2017, was executed well. Now, investors can pay more attention toward investing behind its brands. Although the transition remains a headwind to sales in the recent times, as the company rationalizes SKUs and resets pricing to customers, it should improve efficiency in the long term.

Kellogg boasts a legacy of more than 100 years, built on solid product portfolio and brand identity, in both cereals and snacks. Popular Kellogg’s brands include Kellogg’s, Keebler, Pop-Tarts, Eggo, Cheez-It, Nutri-Grain, Murray, Austin, Morningstar Farms, Famous Amos, Ready Crust and Kashi. In June 2012, the company acquired Procter & Gamble’s snack unit, Pringles, which is now its second-largest brand.

Kellogg is reaping the benefits of these aforementioned sales-building efforts that can be seen from its last reported quarter’s results. The company reported revenues of $3.21 billion, increasing 3.6% year over year. The upside can be primarily attributed to the December 2016’s acquisition of Parati in Brazil and October 2017’s takeover of RXBAR, along with favorable currency translation. The top line outpaced the consensus mark of $3.11 billion by 3.2%.

Cost-Saving Initiatives are Driving Earnings: Cost-saving initiatives like Project K and zero-based budgeting program are also somewhat compensating for the weakness in sales. Although the top line has been weak, Kellogg’s margin growth has been impressive. Pricing and mix improvement are anticipated to give support to its bottom-line growth.

The Zacks Consensus Estimate calls for the company’s 2018 earnings to increase 10.4% year over year. In 2019, Kellogg is expected to come up with a decent performance as well, wherein its bottom line is expected to grow 6.6%.

Expansion Into Emerging Markets: Kellogg is slowly building its business in the emerging markets of Asia, Central and Eastern Europe, the Middle East and the African regions. The Pringles acquisition has also opened up growth opportunities in these fast-growing nations.

Kellogg has tripled its emerging market business over the last decade. In particular, management targets well-performing countries like India, South Africa and Brazil for growth.

Emerging markets provide huge growth opportunity for Kellogg. In 2017, the company integrated and anticipated growth in Parati, tripling its scale in Brazil and providing further growth and cost synergies. Through its joint ventures, Kellogg is rapidly expanding in West Africa and China, where it is building distribution and brand awareness in big emerging markets.

Solid VGM Score and ROE: The company has an impressive VGM Score of B. Our VGM Score identifies stocks that have the most attractive value, growth and momentum characteristics. In fact, our research shows that stocks with VGM Scores of A or B when combined with a Zacks Rank #1 or 2, make solid investment choices.

Kellogg’s trailing 12-month return on equity (ROE) supports its growth potential. ROE in the trailing 12 months is 70.4%, while the industry gained 10.1%, reflecting the company’s efficient usage of shareholders’ funds.

Other Key Picks

Other top-ranked stocks in the same industry are Medifast, Inc. (MED - Free Report) , US Foods Holding Corp. (USFD - Free Report) and United Natural Foods, Inc. (UNFI - Free Report) , each sporting a Zacks Rank #1.

Medifast, US Foods Holding and United Natural Foods are likely to witness 41.9%, 48.6% and 19.1% earnings growth this year, respectively.

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