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Analyzing Kellogg’s Cash Flow Guidance for 2016

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Fiscal 2016 EPS guidance

In the third part of the series, we discussed Kellogg’s guidance for the EPS (earnings per share) in 2016. In this part, we’ll consider what else is included in the guidance. The integration costs of the company’s transactions in Egypt and Nigeria in 2015 are estimated to be $0.02–$0.03 per share in fiscal 2016. This could impact the earnings. Also, incremental savings from Project K are expected to be ~$100 million for fiscal 2016.

The EPS guidance excludes the impact of the following items:

  • mark-to-market adjustments
  • integration costs
  • costs related to Project K
  • foreign-currency translation
  • remeasurement of the Venezuelan business
  • other items that could impact comparability

However, the guidance includes the impact of acquisitions and dispositions.

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Cash flow guidance

Kellogg continues to expect that it will achieve its long-term goal of 4%–6% for operating profit growth in fiscal 2016. Kellogg expects an improved gross margin through savings from Project K and zero-based budgeting. Deflation and the cost of goods sold driven by material costs also are expected to impact the gross margins. The company expects interest expenses to be $235 million–$245 million. This would reflect an estimated rise in rates and slightly higher debt levels. The adjusted effective tax rate is projected to be 27%–28%.

The company also announced in its 4Q15 earnings release that it expects the fiscal 2016 cash flow to be ~$1.1 billion. The capital expenditure for the year is expected to be 4%–5% of sales. This would include the effect of the cash required by Project K and a rise in capital spending equal to ~1% of sales to support the growth of the Pringles business.

Kellogg’s peers in the industry include Hershey (HSY), Cal-Maine Foods (CALM), and McCormick & Company (MKC). Hershey and McCormick & Company have seen YTD (year-to-date) returns of 1.8% and 8.7%, respectively. Kellogg and Cal-Maine Foods have seen YTD returns of 5.7% and 8.7%, respectively, as of April 27. The PowerShares High Yield Equity Divide (PEY) invests 1.7% of its holdings in Kellogg.

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