Analysts expect Kellogg (K) to report adjusted earnings of $1.05 per share in the second quarter of 2018, representing a YoY (year-over-year) growth rate of 8.2%. The projected growth rate seems impressive, especially considering the pressure on profitability due to the list price adjustment, brand building investments, increased interest costs, and higher raw material and transportation costs.
Cost saving and lower taxes to drive EPS
Kellogg’s bottom line is projected to benefit from its productivity and cost-saving initiatives, including the Project K program. Meanwhile, strong overhead savings from its DSD transition, a lower effective tax rate, and share buybacks are expected to drive the bottom-line growth.
However, lower net price realization, higher freight costs, and increased interest expenses are likely to remain a drag. The company’s management expects adjusted earnings to see 9%–11% growth in 2018 on a constant-currency basis.
In comparison, the company’s peers also saw YoY improvements in their earnings due to the lower tax rate. However, the increased interest expenses, driven by higher debt related to the financing of acquisitions, are expected to hurt bottom-line growth rates.
General Mills’ (GIS) bottom line is projected to stay flat or decline 3.0% in fiscal 2019 due to the higher interest expenses related to the financing of the acquisition. Meanwhile, Conagra Brands (CAG) and J.M. Smucker’s (SJM) earnings could also feel the pinch of increased interest expenses in the coming quarters.