Streetwise for Sunday, September 3, 2017

Financial markets reflect the cyclic nature of the global economy. Therefore, equity portfolios will periodically cycle through peaks and troughs as the economies of the world ebb and flow.

Nonetheless, there are always bargains available in the shares of companies that have suffered at the hands of those to whom the glass is always half empty. A good example is Kellogg (K), a company that I still associate with Snap, Crackle and Pop and one that has been raising dividends for 12 consecutive years.

Founded in 1906, Kellogg’s principal products include ready-to-eat cereals and convenience foods, frozen foods and waffles, toaster pastries, cereal bars, fruit-flavored snacks, and veggie foods, as well as health and wellness business bars, and beverages.

When I last wrote about the company a year ago, my earnings estimate for fiscal 2017 was $4.00 per share with an estimated 12-month share price of $89 for a 7.2 percent capital gain, plus the 2.49 percent dividend.

At the request of many readers, I am going to update both my numbers and my current thoughts about the company as a potential investment going forward. One of the reasons of course is the latest acquisition of Whole Foods by Amazon and Amazon’s subsequent price slashing. The result has been a cratering of share prices at the likes of Wal-Mart.

To quote Amazon, “We’re going to lower prices on a selection of best-selling grocery staples. And this is just the beginning — we will make Amazon Prime the customer rewards program at Whole Foods Market and continuously lower prices as we invent together.”

For example, bananas used to cost 99 cents a pound at Whole Foods versus 49 cents at Wal-Mart. It appears that this will no longer be the case. No, cereal and snack foods were not mentioned, although Whole Foods does carry similar products. However, virtually nothing was cost competitive with your average grocery store. Now competition is certainly in the air.

While I do not think that Kellogg will be placing product on Whole Food’s shelves, the company remains strong and one to be contended with. Retailers are only interested in what product sells.

Kellogg’s second-quarter net sales and operating profit performance improved sequentially from the first quarter. Second quarter 2017 earnings per share increased by one percent from the prior-year quarter.  Operating profit increased one percent with a higher operating profit margin.

The Company reaffirmed its guidance but is continuing to forecast a decline in comparable net sales of about three percent in 2017. Operating earnings are still expected to increase 7 to 9 percent year over year, as productivity savings offset the impact of lower net sales.

Kellogg is forecasting earnings growth of 8 to 10 percent off a 2016 base that excludes after-tax $0.02 from deconsolidated Venezuela results, to between $4.03 and $4.09 per share. The growth is expected to be driven by the 7-9 percent growth in operating profit, with roughly one percent of additional leverage from modestly lower shares outstanding.

The Company indicated its guidance for 2017 cash flow, forecasting cash from operating activities of approximately $1.6 to 1.7 billion. After capital expenditure that translates into cash flow of $1.1 to 1.2 billion. The latter would be an increase over 2016’s $1.1 billion.

Kellogg recently announced a 4 percent dividend increase. The upcoming dividend payment will be its 371st since 1925. The company has been raising dividends for 12 consecutive years. The current annual dividend yield is 3.19 percent, versus 1.93 percent for the S&P 500.

The intrinsic value of the shares using a free cash to the firm model is $102. I am going to update my earnings estimate for fiscal 2017 is $3.97 per share with an estimated 12-month share price of $73 for a 10 percent capital gain, plus the 3.19 percent indicated dividend.

Note to Readers: I will again be teaching two courses for Ringling College’s Lifelong Learning Academy – Introductory Investment Analysis and Portfolio Management. Classes begin on September 25 and run every Monday for 8 weeks. Call 941-309-5111 or go to www.RCLLA.org.

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.