We have downgraded our recommendation on Kellogg Company (K) to Sell from a Hold on weak third-quarter 2011 earnings of $0.80 per share, which lagged the Zacks Consensus Estimate by 10.1% and the prior-year earnings by 11%. The results were driven by weak economic environment, increased cost of goods sold and increased supply-chain costs due to the reinstatement of incentive compensation costs.
The company expects these costs to rise for the foreseeable future. Though the company has shown compelling signs of improvement in the third quarter, particularly in the top-line growth, the results seem bleak in the challenging environment. Thus, the company has reaffirmed its 2011 internal sales guidance growth in the range of 4% to 5%.
Kellogg lowered its 2011 internal operating profit guidance to a range of down 2% to 4%. Earnings are also expected to remain approximately flat for 2012. Moreover, intense competition from other established players and high debt load undermines the company's future growth prospects.
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