International Weakness Weighs On Kellogg's Otherwise Solid Q2

| About: Kellogg Company (K)

Global food company Kellogg (NYSE:K) reported stronger than expected second quarter earnings Thursday morning. Operating earnings per share fell 5.1% year-over-year to $0.89, five cents higher than consensus expectations. Revenue grew 2.6% to $3.5 billion, which was also slightly higher than consensus estimates. The firm also completed the acquisition of Pringles, which should help grow its snack business. Gross margins were 40.6%, down 200 basis points when compared to the same period a year ago.

Not surprisingly, sales growth in the U.S. outpaced the rest of the world, which was negatively impacted by currency fluctuations. The U.S. Morning Foods segment grew 1.2% year-over-year during the second quarter to $939 million, while segment operating income increased 4% to $183 million. Management pointed to strong performance from Pop-Tarts as a powerful growth engine. The U.S. Snacks business grew 10.1% to $803 million, driven mostly by the acquisition of Pringles and internal growth of 4.1%. As a result, operating profit grew 5.4% to $117 million.

The U.S. Specialty business grew 8.6%; however, strong U.S. growth was not enough to compensate for currency fluctuations and weak demand abroad. European revenue fell 3.3% to $613 million, and profit plummeted 29.4% to $72 million. We suspect pricing remains relatively weak in the struggling areas of the European Union. Internal net sales in Latin America grew 6.8% year-over-year, but reported sales fell 2.5% to $274 million. Much like in Europe, operating profit was hammered, down 21.2% to $48 million, though this was mostly a result of a negative currency impact. Internal net sales in Asia-Pacific fell 2% during the second quarter due to slumping demand in Australia, and reported revenue fell 6.6% to $224 million.

Though weakness continues internationally, we thought Kellogg's second quarter was decent. Profits were expected to fall, but we think consumers are returning to brand name products in the U.S. from generic and private label brands that surged in popularity in the wake of the financial crisis. We think shares are fairly valued at current levels, and its score of 4 on the Valuentum Buying Index (our stock-selection methodology) suggests we'd wait for technicals and fundamentals to improve before considering the firm for addition to the portfolio in our Best Ideas Newsletter (please view links on our left side bar for more information). We also aren't huge fans of the company's dividend, as our proprietary dividend-cut predictor, the Valuentum Dividend Cushion, suggests very poor dividend coverage with future cash flow.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.