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Summary

  • At around $63 per share, investors that are looking for a good defensive stock that is on the rebound should consider Kellogg.
  • Analysts seem broadly positive about the company's prospects after two years of underperformance.
  • Based on 2015 estimates of $4.22 per share, this stock should reach $70 in the next 12 to 18 months.

Leading cereal/packaged food company Kellogg (NYSE:K) will report second-quarter earnings results Thursday. Since the stock hit a 52-week high of $69.50 in early June, Kellogg shares have been stuck in a box -- trading between $66 and $64 per share.

The stock closed Tuesday at $64.89. But as of this writing, shares are down roughly 2% to $63.67. If this decline holds, Kellogg would have lost one-third of its year-to-date gains of 7.7%. And with the entire packaged food industry still suffering from weak volumes and low margins, Kellogg's second-quarter results have to show meaningful outperformance for these shares to work in the long term.

Wall Street will be looking for $1.02 in earnings per share on revenue of $3.71 billion. This would represent a 2% year-over-year earnings increase, while revenue is projected to be flat. For the full-year, analysts are projecting earnings of $3.98 on revenue of $15 billion. But will this be enough?

The company has posted an average of 40% jump in profits over the past four quarters, including the January quarter, when Kellogg more than doubled its profits from the year prior.

From my vantage point, the near-term headwinds won't matter a whole lot. While some may fear the extent to which rivals like Post (NYSE:POST) and General Mills (NYSE:GIS) have caught up to Kellogg, it is the latter that is still leading the charge on food shelves. This is even though Post and General Mills have ramped up ad/marketing spending to attack Kellogg's market share.

It shows that Kellogg still possesses the competitive leverage with retailers to offset breakfast weakness with growth is areas like snack foods. These are strong growth opportunities for Kellogg to balance its product portfolio. And I believe the company has some opportunities to address some weakness in its marketing efforts to fight off Post and General Mills.

To that end, the company has focused on increased brand building and strategies to improve/maximize price mix, which the company expects to trend higher through the fiscal year. And with the cereal business accounting for roughly 45% of the Kellogg's total revenue, management has its work cut out.

That's not going to be easy. But volumes have to improve at some point. And management has communicated on more than one occasion that posting stronger organic growth remains a priority. They've promised that top line will return to growth following two consecutive quarters of slumping revenue.

The good news, though, is that analysts seem broadly positive about the company's prospects after two years of underperformance. The consensus estimate of $1.02 have been raised by 2 cents over the past three months. This is even though both Post and General Mills have outperformed Kellogg in the organic growth area.

Given that Kellogg has not been shy about doing deals, including acquiring strong brands like Keebler and Pringles, organic growth has become a well-followed metric, which tracks revenue growth excluding acquisitions. And I expect Kellogg to show improvement in this area, affirming to investors that they have made the right long-term investment.

All told, this is still a well-run company that is trading at an attractive multiple of 12 and pays a strong 2.70% yield. At around $63 per share, investors that are looking for a good defensive stock that is on the rebound should consider Kellogg. And based on 2015 estimates of $4.22 per share, this stock should reach $70 in the next 12 to 18 months.

Source: Why Kellogg Can Still Satisfy Investors' Appetite For Value