EPS could continue to fall
We expect the Kellogg Company’s (K) earnings to remain subdued in the coming quarters, reflecting pressure on its margins. Kellogg’s adjusted earnings have fallen in the past two quarters, and the rate of decline accelerated in the first quarter of 2019. Kellogg’s adjusted EPS fell 17.9% on a YoY (year-over-year) basis during its last-reported quarter.
We expect Kellogg’s adjusted EPS to mark a similar decline in the second quarter of 2019, reflecting low profit margins and higher interest expenses. Kellogg’s profit margins are expected to stay low given its low organic sales and a mix shift toward low-margin categories and markets. Moreover, higher input costs and a planned increase in packaging and brand marketing investments could further suppress its margins and, in turn, its EPS. Higher interest expenses are also expected to drag its earnings down. Its weakness in the first half is likely to drag on its full-year earnings.
Inflation in input costs and higher interest expenses driven by the funding of their recent acquisitions have pressured the bottom lines of food companies. The bottom lines of General Mills (GIS), Conagra Brands (CAG), the Campbell Soup Company (CPB), and the J.M. Smucker Company (SJM) have taken hits as a result of the rise in interest expenses.
What analysts expect
Wall Street expects the rate of Kellogg’s bottom line decline to worsen, as we can see in the graph above. Analysts’ consensus estimate indicates a potential fall of 19% in Kellogg’s second-quarter EPS. Moreover, analysts expect its adjusted EPS to register a fall of ~7% in the third quarter. Kellogg’s EPS are projected to return to growth in the fourth quarter. However, its weakness in the first nine months of 2019 is expected to drag its full-year earnings down in the double digits.