Strong double-digit growth
The Kellogg Company (K) managed to report double-digit growth in its adjusted EPS in the first two quarters of 2018. During its last-reported quarter, its adjusted EPS jumped 17.5% on a YoY (year-over-year) basis. The company’s impressive bottom line growth comes despite the significant pressure on its margins from lower pricing and rising costs (primarily transportation costs).
A significant fall in the adjusted effective tax rate and strong productivity and cost savings from its direct store delivery transition are driving the double-digit growth in the company’s EPS. Besides Kellogg, Conagra Brands (CAG) and Mondelēz (MDLZ) are two other packaged food manufacturers that have impressed investors with their solid EPS growth rates recently.
Mondelēz’s bottom line has grown at a double-digit rate in the past five quarters. Meanwhile, Conagra Brands recorded stellar growth in its EPS in all four quarters of its fiscal 2018. A lower effective tax rate, cost savings, and an improving sales trend are driving bottom line growth for these companies.
Kellogg is likely to sustain its EPS growth momentum in the second half of 2018. Management has raised its bottom line guidance for 2018 and now expects the company’s adjusted EPS to grow 11.0%–13.0%, up from its previous growth guidance of 9.0%–11.0% on a currency-neutral basis.
Productivity savings from the Project K program, lower overhead costs due to the direct store delivery transition, and a fall in the tax rate are likely to support Kellogg’s growth. However, near-term margin headwinds, such as lower pricing, higher transportation costs, and higher interest expenses, are likely to restrict the company’s bottom line growth rate.