Kellogg Company K is set to report first-quarter 2015 results on May 5, before the market opens. Last quarter, the company delivered a negative earnings surprise of 6.52%. Let’s see how things are shaping up for this announcement.
Factors to Consider
Kellogg is witnessing soft sales in its cereal business in developed markets as well as in the U.S. snacks business.
Kellogg’s mainstay U.S. cereal business — contributing 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 and Kashi.
The U.S. snacks business has been struggling since 2013 due to weak volumes. Though Pringles has done well, the U.S. snacks downfall in 2014 resulted from weakness in weight management products like Special K bars, Special K cracker chips and Right Bites' 100-calorie cookie packs due to the same issues that hurt sales of weight management cereal brands.
The cereals and snacks businesses are unlikely to show any improvement in the sales trends in the first quarter either.
In fact, in 2015, Kellogg expects a difficult macroeconomic environment as well as significant currency headwinds due to the devaluation of some foreign currencies. In fact, Kellogg’s organic sales, adjusted operating profit and earnings per share guidance for 2015 are far below the long-term targets. We believe that it is difficult for the company to achieve growth even in 2015 given the combination of 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 #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 0.00% as the Most Accurate estimate as well as the Zacks Consensus Estimate stand at 92 cents.
Zacks Rank: Kellogg’s Zacks Rank #3 (Hold)when combined with a 0.00% ESP makes surprise prediction difficult.
We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.
Stocks to Consider
Some stocks in the broader food/beverage sector that have both a positive Earnings ESP and a favorable Zacks Rank are:
Treehouse Foods, Inc. THS, with an Earnings ESP of +1.72% and a Zacks Rank #3.
Mondelez International, Inc. MDLZ, with an Earnings ESP of +2.70% and a Zacks Rank #3.
Tyson Foods, Inc. TSN, with an Earnings ESP of +1.37% and a Zacks Rank #3.
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