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Why is Kellogg (K) Up 10.7% Since Its Last Earnings Report?

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It has been about a month since the last earnings report for Kellogg Company (K - Free Report) . Shares have added about 10.7% in that time frame.

Will the recent positive trend continue leading up to its next earnings release, or is K due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

First-Quarter 2018 Results

Earnings Beat

First-quarter comparable earnings of $1.19 per share came ahead of the Zacks Consensus Estimate of $1.07. The bottom line increased 11.2% year over year on higher business delivery, lower effective tax rate and reduced restructuring charges.

Revenues Beat

Kellogg reported revenues of $3.4 billion, increasing 4.7% year over year. The upside can be primarily attributed to the October 2017 takeover of RXBAR, improved business delivery along with favorable currency translation. The top line outpaced the consensus mark of $3.32 billion.Currency and acquisitions had a 2.5% and 1.6% positive impact on revenues in the quarter. Accordingly, organic r evenues (excluding the impact of acquisitions, dispositions and foreign exchange) inched up 0.6% against 1.5% decline in the last reported quarter. This marks the company's best performance in several quarters. Except North America, organic sales improved across all other regions.

Volumes increased 2.9% in the quarter, while remaining unchanged in the preceding quarter. Meanwhile, price/mix had a 2.3% adverse impact on sales versus 1.5% negative contribution in the last reported quarter.

Margin Details

Kellogg’s adjusted gross margin (currency-neutral adjusted) in the quarter was down 120 basis points (bps) from the year-ago quarter’s level.

Kellogg’s operating margin (currency-neutral comparable growth) was 14.7%, reflecting an improvement of 40 bps year over year. The uptick can be attributed to higher sales benefit and strong productivity savings related to the Project K restructuring program, particularly last summer’s exit from its U.S. Snacks segment's Direct Store Delivery (DSD) system.

Segment Discussion

Total North America: Kellogg’s North America sales improved 1.8% (down 0.6% organically) from the prior-year quarter to $2.3 billion. The upside was mainly driven by the acquisition of RXBAR and favorable currency translation. However, organically, sales declined due to the impacts related to the transition of DSD in the U.S. Snacks business as well as persistent consumption softness in U.S. cereal business. Volumes increased 1.5% against a decline of 0.7% in the last reported quarter. Price/mix was down 2.1% compared with 2.6% decline in the last reported quarter. Adjusted (comparable) operating profit grew 3.7% in the segment.

Europe: The segment’s revenues of $587 million improved 14.4% and currency had a 12.2% positive impact on the same. Organically, sales were up 2.2% in the quarter compared with 3% growth in the fourth quarter. Adjusted operating profit improved 1.1% as well.

Latin America: Revenues of $232 million in the segment improved 5.3% (organically, sales were up 3.3%). Price/mix, volume and currency had a 0.5%, 2.8% and 2% positive impact on sales, respectively. However, adjusted operating profit plunged 32.8% in Latin America.

Asia Pacific: The segment’s revenues of $252 million improved 11% on the back of strong growth in cereals in the emerging markets and continued expansion of Pringles. Organically, sales increased 6.2%, better than 4.3% growth in the fourth quarter. While volume increased 7%, price/mix had a negative impact of 0.8% on sales. Adjusted operating profit improved 17.3% in the Asia Pacific.

2018 View

Kellogg expects revenue growth in the range of 3-4% (versus flat growth expected earlier) on  a currency-neutral basis for 2018. On an organic basis, sales are expected to decline 1-2%, of which 1% is related to the negative impact of U.S. Snacks’ DSD transition, including its list-price adjustment and rationalization.Adjusted operating profit growth (constant currency) is projected in the range of 5-7% (versus 4-6% expected earlier). Cash from operating activities is expected to increase in the band of $1.7-1.8 billion for 2018 driven by higher net income, sustained working-capital improvement and benefits from the U.S. Tax Reform.It still projects adjusted earnings to grow in the range of 9-11% at constant currency.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. There have been seven revisions lower for the current quarter.

Kellogg Company Price and Consensus

 

Kellogg Company Price and Consensus | Kellogg Company Quote

VGM Scores

At this time, K has a nice Growth Score of B, though it is lagging a lot on the momentum front with a D. 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 investors.

Outlook

Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. Notably, K has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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