Pressure on Earnings Could Limit the Upside in Kellogg Stock



Kellogg’s earnings are expected to decline

Kellogg’s (K) earnings are projected to decline in 2019, which could limit the upside in the stock. We expect Kellogg’s margins to continue to slide in the near term, affecting earnings. Lower net price realization, a mix shift toward low-margin categories and markets, and higher input and transportation costs are likely to take a toll on margins and EPS.

The management team expects adjusted EPS to decline in the range of 5%–7% on a constant-currency basis in 2019. It stated that planned investments in packaging and advertising and higher commodity costs are likely to drag the company’s earnings down. Pricing is expected to remain low in the near term, which could affect organic sales growth and EPS. Meanwhile, the consolidation of Multipro’s operations is likely to pressure margins and EPS as well.

Wall Street expects Kellogg’s adjusted EPS to decrease 22.6% in the first quarter of 2019 and more than 15% in the second quarter. For the full year, analysts project an 8.2% decline in Kellogg’s bottom line.

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Valuation and rating

Kellogg stock trades at a forward PE multiple of 14.3x and offers a dividend yield close to 4%. However, the pressure on sales and earnings makes it an unattractive bet. The top lines of other packaged food companies, including Kellogg, Kraft Heinz (KHC), General Mills (GIS), and Conagra Brands (CAG), are expected to take a hit from adverse currency volatility. However, acquisitions are expected to drive their top lines. Meanwhile, continued pressure on margins and higher interest expenses are likely to restrict EPS growth in the near term.

Most analysts covering Kellogg stock remain on the sidelines and recommend a “hold.”


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