There’s A Problem On Wall Street
There’s a problem on Wall Street and it is affecting most sectors. Analysts expecting just a little too much from some high-profile companies are having their hopes dashed and share prices are suffering for it.
Kellogg (K) is a great examples of what I am talking about. In Kellogg’s case, revenue fell on a YOY basis but beat expectations, it was the guidance that got this stock moving lower. The guidance calls for a decline in YOY revenue and earings that came in below the analyst’s consensus.
The catch is that divestitures made in the middle of 2019 make the comparisons difficult. Today’s sell-off in the stock may just be a knee-jerk reaction. While today’s news is bad news for some, this situation is setting up a buying opportunity for others. Kellogg is working on a growth strategy that includes a repositioning of its portfolio, a focus on key brands, and driving cash-flow growth in the coming years.
Kellogg: The Guidance Is Weak But Doesn’t Compare Well
Kellogg reported 4th quarter revenue and EPS that were better than expected despite a YOY decline. The decline in sales is due to the aforementioned divestitures, The beat was driven by a 2.7% increase in organic sales. The increase in sales would have produced better results but that strength was offset by downward pricing pressure.
The full-year results are better, the company delivered positive sales growth in its core brands for 2019 and is expecting to build on that in 2020. On a YOY basis, revenue and earnings are going to fall in 2020 but this is due to those same divestitures. The loss of revenue from those businesses more than offsets growth in the core business.
Looking forward, the YOY comparisons will be difficult until the third quarter of this year but even then won’t be true comps. The salient point is that the core business is growing. Until the YOY comps come back into alignment the sequential quarterly figures will be more important.
The Dividend Is Safe
On an adjusted basis the company is still growing and, most importantly, so is its cash flow. Kellogg is a Dividend Aristocrat in the making so cash flow and free-cash-flow are more important than headline growth. With the payout at the current level, the payout ratio is running about 60%. While on the high side, 60% is well within acceptable levels and still leaves room for future increases.
"In 2019, our primary financial objective was to deliver sales growth, and we did exactly that," said Steve Cahillane, Kellogg Company's Chairman, and Chief Executive Officer. "By executing our Deploy For Growth strategy, we posted sales growth for the full year, across key brands and categories. Importantly, we delivered this growth and our other financial commitments while realigning our organizational structure, reshaping our portfolio, and investing in our supply chain. These actions are building a foundation for a steady, reliable growth in sales, profit, and cash flow for years to come."
With today’s discount to share prices, the dividend is yielding over 3.25% with distribution increases in the forecast. The company has been raising the distribution for 15 years with another increase expected over the summer. The distribution growth rate isn’t fantastic, only 3.5%, but there is an argument to be made for its sustainability.
The Technical Outlook: Trading At A Key Support Level
Share prices for Kellogg fell more than -6.0% at the open but above key support levels. Key support is at the $64 level and a point of technical break-out in 2019. Price action is already showing signs of buying but cautious traders may want to wait. MACD momentum suggests the selling isn’t over and support could break.
The prudent move is to wait for price action to reconfirm support at this level before committing to large positions. The risk is that support will break and worse, another round of selling will ensure. A break in support at this level could lead the stock down another $3 to $4 (5% to 6.5%).
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