uploads/2018/09/corn-flakes-2546097_1280.jpg

Where Is Kellogg Stock Headed?

By

Updated

Stock performance

Kellogg (K) stock is up 6.1% YTD as of September 25. However, the company’s stock has seen a steep recovery (as can be seen in the graph) and has grown 27.3% since it reported its first-quarter results on May 3.

In comparison, McCormick (MKC) and Mondelēz (MDLZ) are up 26.8% and 1.1%, respectively, on a YTD basis. Meanwhile, Kraft Heinz (KHC), Campbell Soup (CPB), and General Mills (GIS) are down 28.4%, 18.8%, and 26.2%, respectively. The S&P 500 Index increased ~9% during the same period.

Article continues below advertisement

Healthy H1 2018 performance and improved outlook

Kellogg is one of the very few packaged food manufacturing companies in North America that has impressed investors with its financial performance so far this year. Besides Kellogg, Mondelēz, McCormick, and Conagra Brands (CAG) are the other three companies that have defied industry woes and have reported impressive sales and earnings growth.

Kellogg’s base business is showing signs of improvement. Meanwhile, recent acquisitions are generating incremental sales and meaningfully contributing to the company’s top line. Plus, a focus on cost savings and a lower effective tax rate are supporting the company’s bottom-line growth. Moreover, the company’s management raised its full-year sales and earnings outlook following the healthy H1 2018 results, which should boost investors’ confidence in the stock.

However, the company’s margins remain pressured owing to the downward adjustment in list price following its transition from DSD (direct store delivery) and higher transportation costs. Notably, Kellogg annualized the downward adjustment in its pricing, which is a positive, as it is expected to ease the pricing pressure, and in turn, support organic sales and margins. Despite the benefits, the company’s margins are likely to remain low owing to the adverse mix and higher transportation costs.

Moreover, analysts expect Kellogg’s Q3 EPS growth rate to slow down significantly, which could restrict the upside in the stock.

Advertisement

More From Market Realist