Streetwise for Friday, August 24, 2018

Financial markets reflect the cyclic nature of the global economy, meaning that equity portfolios will also periodically cycle through peaks and valleys.

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 13 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 $3.97 per share with an estimated 12-month share price of $73 for a 10 percent capital gain. In addition, there was a 3.19 percent indicated dividend. So how did Kellogg do when compared to my forecast? Earnings came in at $4.04 and the shares recently closed at $73.72.

Despite increased earnings during the second quarter, Kellogg noted that transportation costs were beginning to impact the company’s profit margin. Nonetheless, the second quarter’s productivity savings continued to come in as planned, due in no small part to the overhead reduction associated with the closing of the direct store delivery system in its Snacks division.

The exit from Direct-Store Delivery included the elimination of a price-premium Kellogg had previously charged for DSD services. As a result, Snacks business stabilized with increased sales in the second half, helping to offset those higher transportation costs.

Growth in Mexico, the Caribbean, and Central America offset the negative impact of a ten-day trucking strike in Brazil. Kellogg’s Latin America division’s operating profit decreased sharply due to a substantial increase in advertising and promotion investment, as well as costs related to the disruption resulting from the Brazilian trucking strike.

To compensate for rising prices and to appeal to today’s customers, Kellogg has begun diversifying its health-conscious brands, while also focusing on so-called “indulgent cereals” that evoke nostalgia for consumers.

The company purchased RXBAR (protein bars etc.) in 2017 for $600 million and attempted to generate interest in cereals like Chocolate Frosted Flakes and Froot Loops with marshmallows.

For the second quarter, net sales were $3.4 billion, which exceeded Street forecasts, rising 5.9 percent when compared to the same period a year ago. However, the strengthening of the dollar negatively impacted Kellogg’s top line by 0.4 percent.

Kellogg’s margins remained on the weak side, reflecting lower selling prices and the higher logistics costs. However, adjusted earnings rose 17.5 percent, due to a lower effective tax rate.

Because of improved performance in the first half of the year and an improving business trend, Kellogg raised its 2018 sales and earnings growth guidance. Its net sales are now projected to increase 4 to 5 percent in 2018, up from an earlier expectation of 3 to 4 percent.

Benefits from the acquisitions of RXBAR and Multipro (Nigerian food distributor) are expected to contribute 4 to 6 percent to Kellogg’s net sales growth rate. And Kellogg will benefit from growth in Pringles and frozen foods brands Eggo and MorningStar Farms. However, lower prices and a softness in its Morning Foods division is expected to remain a drag.

For an indication of the future, consider what Steve Cahillane, Kellogg’s CEO, said in an interview with the Wall Street Journal last February, “Cereal does not have to be the growth engine of Kellogg…the growth engine is snacks around the world.”

The intrinsic value of the shares using a free cash to the firm model is $82.18. My earnings estimate for fiscal 2018 is $4.43 per share with an estimated 12-month share price of $79 for a 9.5 percent capital gain. There is also an indicated dividend of 3.04 percent.

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