Kellogg Company (K) is set to report fourth-quarter and full-year 2014 results on Feb 12, before the market opens. Last quarter, the company delivered a positive earnings surprise of 1.08%. Let’s see how things are shaping up for this announcement.
Factors to Consider
Kellogg has reported weak sales results in the three quarters of 2014 reported so far due to soft sales in the U.S. cereals and snacks businesses stemming from the challenging operating environment.
Kellogg’s mainstay U.S. cereal business — accounting for 40–45% of sales — has been performing poorly since 2012 due to sluggish category growth. Lower demand for cereals due to competitive pressures from other breakfast alternatives, such as yogurt, eggs, bread and peanut butter, is hurting category growth. Moreover, changing consumer views on health and wellness and shift in consumer attitude from dieting to health and wellness has hurt sales of Kellogg’s weight management cereal brands, like Special K. The segment is unlikely to show any improvement in the fourth quarter as well.
In fact, Kellogg’s organic sales, adjusted operating profit as well as earnings per share guidance for 2014 are far below the long-term targets — suggesting that 2014 could prove to be worse than 2013. We believe it is difficult for the company to report growth even in 2015 given the weak sales trends and reinvestments in the business.
Earnings Whispers
Our proven model does not conclusively show that Kellogg is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESPand a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here, as you will see below.
Zacks ESP: The Earnings ESP is -1.09% as the Most Accurate estimate stands at 91 cents while the Zacks Consensus Estimate is pegged higher at 92 cents.
Zacks Rank: Kellogg has a Zacks Rank #4 (Sell). We caution against stocks with Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.
Stocks to Consider
Here are some food stocks that have both a positive Earnings ESP and a favorable Zacks Rank are:
SUPERVALU, Inc. (SVU), with an Earnings ESP of +4.76% and a Zacks Rank #1 (Strong Buy).
The J. M. Smucker Company (SJM), with an Earnings ESP of +1.33% and a Zacks Rank #3 (Hold).
Kraft Foods Group, Inc. (KRFT), with an Earnings ESP of +1.37% and a Zacks Rank #3.
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