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Why Did Credit Suisse Downgrade Kellogg to ‘Neutral’?

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Price movement

Kellogg (K) has a market cap of $25.4 billion. It rose 0.94% to close at $72.65 per share on December 7, 2016. The stock’s weekly, monthly, and year-to-date (or YTD) price movements were 0.90%, -2.4%, and 3.3%, respectively, on the same day.

K is trading 0.22% below its 20-day moving average, 2.0% below its 50-day moving average, and 4.9% below its 200-day moving average.

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Related ETF and peers

The Consumer Staples Select Sector SPDR ETF (XLP) invests 1.2% of its holdings in Kellogg. The YTD price movement of XLP was 3.8% on December 7.

The market caps of Kellogg’s competitors are as follows:

  • Mondelez International (MDLZ): $65.3 billion
  • ConAgra Foods (CAG): $16.6 billion
  • Post Holdings (POST): $5.0 billion

Kellogg’s rating

On December 7, 2016, Credit Suisse downgraded Kellogg’s rating to “neutral” from “outperform.” It also reduced the stock’s price target to $77 per share from $84 per share.

According to analyst Robert Moskow, “We are downgrading Kellogg stock to Neutral and lowering our target price to $77/share. As we had hoped for when we upgraded the stock last year, the management team look on a greater sense of urgency to accelerate its margin targets and cost savings programs to adapt a slower growth environment and perhaps pre-empt an unwelcome bid from a strategic acquirer. However, the company’s revenue growth rate continued to under-punch its peers due to ongoing pressure in the breakfast cereal category (45% of sales) and company specific problems in wholesome snacks (about 7% of sales).”

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Moskow went on to say, “We believe that consensus estimates for revenue growth and EPS need to go lower to reflect continued challenges for those businesses as well as currency headwinds that we estimate at $0.11/share. As a result, we expect the stock to perform in-line with its peer group in 2017 with only 6% EPS growth and a continued valuation discount relative to consumer peers.”

Performance in fiscal 3Q16

Kellogg reported fiscal 3Q16 net sales of $3.25 billion, a fall of 2.4% from $3.33 billion in fiscal 3Q15 due to unfavorable currency headwinds. The company’s operating margin expanded 260 basis points between fiscal 3Q15 and fiscal 3Q16 due to a reduction in selling, general, and administrative expenses.

Its net income and EPS (earnings per share) rose to $292.0 million and $0.82, respectively, in fiscal 3Q16 compared to $205.0 million and $0.58, respectively, in fiscal 3Q15. A reduction in one-time costs, the effective tax rate, and wider margins impacted EPS. The company reported EPS of $0.96 in fiscal 3Q16, a rise of 12.9% over fiscal 3Q15.

Kellogg’s cash and cash equivalents rose 37.8%, and its inventories fell 2.4% between fiscal 4Q15 and fiscal 3Q16.

Projections

Kellogg made the following projections for fiscal 2016:

  • currency-neutral comparable EPS of $4.16–$4.23
  • currency-neutral comparable operating profit growth of 15.0%–17.0%
  • currency-neutral comparable net sales growth below 4.0%
  • cash flow of ~$1.1 billion

In the next part, we’ll look at Helen of Troy (HELE).

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