We expect Kellogg Company K to beat expectations when it reports second-quarter 2015results on Aug 4, before the market opens. Last quarter, the company delivered a positive earnings surprise of 6.52%.
Why a Likely Positive Surprise?
Our proven model shows that Kellogg is likely to beat earnings this quarter because it has the right combination of two key ingredients.
Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +4.40%. This is very meaningful and a leading indicator of a likely positive earnings surprise for shares.
Zacks Rank: Kellogg carries a Zacks Rank #3 (Hold).
Note that stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 have a significantly higher chance of beating earnings. The Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.
The combination of Kellogg’s Zacks Rank #3 and +4.40% ESP makes us confident of an earnings beat.
Factors to Consider
Kellogg reported better-than-expected results in the first quarter, surpassing the Zacks Consensus Estimate for both earnings and sales despite negative Fx impact. Excluding Fx, earnings increased 3% year over year on the back of improved sales trends, lower taxes and cost savings from the restructuring program — Project K. The improved sales trends resulted from product introductions, brand building initiatives and investments funded by savings from Project K.
Kellogg has been struggling to grow sales over the past two years mainly due to weak performance in its developed market cereals and U.S. snacks businesses. Thus, to improve its sales performance, the company is investing in brand building, in-store capabilities and product and packaging innovation as well as reformulating many existing products. The cost savings from the restructuring program are lending support to brand-building investments to drive demand. These efforts boosted first-quarter results and are likely to aid second-quarter results as well.
Especially, the U.S. cereals and snacks businesses showed improved trends in the first quarter. In cereals, category trends showed signs of improvement and cereal brands gained share in the category. In order to improve its cereals sales performance, Kellogg has launched new campaigns supporting the breakfast occasion. It is also investing in in-store capabilities, product and packaging innovation as well as reformulation of many existing products to drive demand.
We believe the improving sales trend will continue in the to-be-reported quarter.
Other Stocks to Consider
Some stocks in the broader food/beverage sector that have both a positive Earnings ESP and a favorable Zacks Rank are:
Campbell Soup Company CPB, with an Earnings ESP of +2.38% and a Zacks Rank #2.
Dean Foods Company DF, with an Earnings ESP of +3.85% and a Zacks Rank #2.
The WhiteWave Foods Company WWAV, with an Earnings ESP of +4.00% and a Zacks Rank #2.
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