Kellogg Company Looks GRRR-eat! At These Levels

Key Points

• Kellogg shares are pulling back after robust earnings and solid guidance. 
• The stock is a high-yield value in the consumer staples sector. 
• The outlook for margin recovery is positive and may help support the market. 

Shares of Kellogg Company NYSE: K pulled back after reporting solid figures and raising its guidance. The move is contrary to the news and smacks of profit-taking, given the strength shown by other packaged food companies earlier in the reporting season. Names from General Mills NYSE: GIS to Mondelez NASDAQ: MDLZ, Pepsico NASDAQ: PEP and Kraft Heinz NASDAQ: KHC have proven to have pricing power and brand strength, which is driving results at Kellogg.

The takeaway is that price action is returning to more attractive levels and opening an opportunity in yet another high-quality, high-yielding, dividend-growth stock. 

Kellogg Falls On Robust Report And Outlook 

Kellogg had an excellent Q1 and built momentum in its operating regions ahead of the planned separation later this year. The company reported $4.05 billion in net revenue for a gain of 10.4% compared to next year, beating the Marketbeat.com consensus estimate by 250 basis points. The gains were driven by a 14% increase in Kellogg Latin America, a 13% increase in North America, a 7% gain in APAC, and a 3% increase in Europe. Growth is up 13.7% organically and offset by FX headwinds. 

The news that should be moving the market higher is the margin. The company made significant headway on margin recovery and reported earnings well above the Marketbeat.com consensus. The GAAP profits are down YOY due to non-cash mark-to-market impairments. Still, the adjusted operating profit is up 15%, the FX-neutral adjusted earnings 3%, and the adjusted earnings are flat YOY which is a full 1000 basis points better than expected. 

The news that may be weighing on the market is the guidance. The company raised its guidance but not significantly, given the Q1 strength. The company raised its outlook for revenue by tightening the low-end by 100 basis points and increased the EPS guidance by 200 basis points which assumes much of the year’s strength came early and following quarterly results won’t be so profound. However, because of the momentum shown by this Consumer Staple company and the sector at large, Kellogg may increase its guidance again later in the year. 

“We continue to grow net sales organically above our long-term targets, and this growth spans across our Regions and our category groups. We also continue to make progress toward recovering our profit margins,” CEO Steve Cahillane commented. “These better-than-expected results and raised full-year outlook indicate a strong attention to business delivery, even as we execute the transformational separation of Kellogg Company into two, more focused companies.”

The Analysts Are Holding Kellogg’s 3.3% Yield 

The analysts have yet to come out with new commentary, but until they do, the sentiment is pegged at Hold with a price target slightly above the current price action. The price target is up compared to last but slipping in the near term, although that may end now the results are in. The company’s 3.3% dividend is one reason why. The 3.3% yield is compounded by growth expected at 2% annually. That will change once the spin-off is complete, but investors will be left with 2 high-quality dividend-paying stocks unsteady of 1. 

The chart is iffy, showing a market stuck in a range and possibly moving lower within it. As it is, the stock is near the mid-point of the range where support may be expected. If the market moves below this level, it will likely go as far as the bottom of the range, although such a deep decline is not expected.