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What’s Behind Kellogg Stock’s Sharp Rise?

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Stock performance

As of June 25, Kellogg (K) stock had risen ~22% since the company posted strong first-quarter results on May 3. Kellogg, along with Conagra Brands (CAG) and McCormick (MKC), is among the very few food stocks trading positively this year.

Major food stocks Mondelēz (MDLZ), Campbell Soup (CPB), Kraft Heinz (KHC), Hershey (HSY), and General Mills (GIS) have also recovered recently, as shown in the graph below. However, these stocks have fallen year-to-date. In comparison, the S&P 500 (SPX) has risen 1.6% this year, with growing US-China trade tension eroding its previous gains.

Improving trends

Kellogg managed to improve its sales year-over-year and sequentially in the first quarter, despite facing tough industry dynamics and list price adjustment following its DSD (direct-store delivery) transition. The company’s top line is expected to benefit from incremental sales from acquired brands RXBar and Parati. Pringles sales in Europe and other markets have continued to grow.

Also, Kellogg’s operating margin improved in the first quarter, which is rare in the current environment, where food manufacturers are being impacted by higher input and logistics costs and promotional spending.

Kellogg’s strong cost savings from its DSD transition are likely to boost its margins, and in turn, its EPS. Lower tax is expected to cushion its earnings in future quarters. However, weakness in cereals, list price adjustment, and commodity and transportation cost inflation could play spoilsport and restrict growth.

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