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Kellogg's: The 'Growth Story' Continues To Unfold

Aug. 02, 2018 5:59 PM ETKellogg Company (K)GIS, MDLZ2 Comments


  • Kellogg's 6% revenue growth delivered in 2Q18 is the best in years, and about as exciting as it gets in this industry.
  • However, significant cost of goods pressure continues to eat away at margins, this time resulting in flat op profits.
  • High-quality, defensive stocks are worth keeping tabs on, although I favor General Mills in the consumer packaged foods space.
  • Members of my private investing community, Storm-Resistant Growth , can follow this idea, as well as my other top picks with access to my model portfolio. Start your free trial today >>

Kellogg's (NYSE:K) plan to reverse more than five years' worth of declining revenue and dwindling profits continue to unfold.

This morning, the packaged foods giant delivered consensus-beating sales of $3.36 billion that rose the most YOY since at least 2013 - +6%, confirming for now the unlikely "CPG growth story" that I had referred to last quarter. Margin challenges prevented much of the moderate revenue upside from trickling down to pre-tax earnings, yet adjusted EPS of $1.14 topped expectations by two cents.

Credit: Food & Wine

On the results

Late 2017 momentum continued to build, this time lifted by two key international markets. Despite well-known pricing challenges and the 10-day Brazilian trucking strike in May, Europe and Latin America combined managed to offset revenue softness in North America (all on an organic, currency-neutral basis), which this quarter was more pronounced than in 1Q18. The top-line dynamic reinforced (1) the importance of Kellogg's globally-diversified portfolio that generated 47% of sales outside the U.S. vs. 43% last quarter, and (2) that demand for mass-produced packaged foods continue to be solid when marketed at the right price - i.e. cheaper.

Source: DM Martins Research, using data from company reports

Gross margins dipped once again, not surprisingly. In addition to the pricing weakness, the current macro environment of higher wages, commodities and fuel prices continued to pressure Kellogg's profitability. Producer price inflation is one of the most convincing bearish arguments that I can find against betting on packaged foods companies like Kellogg's, especially considering mid-teen op margins that are a bit too narrow to absorb the impact of increasing cost of goods.

Adjusted SG&A, on the other hand, dipped YOY by nearly 3%, helping to keep op income largely flat compared to year-ago levels. The operating leverage could have even been greater, in my view, if not for increased marketing

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This article was written by

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Tracking Economic Inflection Points To Guide Your Asset Allocation Strategy

Daniel Martins is a Napa, California-based analyst and founder of independent research firm DM Martins Research. The firm's work is centered around building more efficient, easily replicable portfolios that are properly risk-balanced for growth with less downside risk.

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Daniel is the founder and portfolio manager at DM Martins Capital Management LLC. He is a former equity research professional at FBR Capital Markets and Telsey Advisory in New York City and finance analyst at macro hedge fund Bridgewater Associates, where he developed most of his investment management skills earlier in his career. Daniel is also an equity research instructor for Wall Street Prep.

He holds an MBA in Financial Instruments and Markets from New York University's Stern School of Business.

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On Seeking Alpha, DM Martins Research partners with EPB Macro Research, and has collaborated with Risk Research, Inc.

DM Martins Research also manages a small team of writers and editors who publish content on several TheStreet.com channels, including Apple Maven (thestreet.com/apple) and Wall Street Memes (thestreet.com/memestocks).

Analyst’s Disclosure: I am/we are long GIS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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