Will Kellogg Post Weak Q2 Results?

  • Kellogg is scheduled to announce its second-quarter results on August 1.
  • We expect the second quarter to stay weak. The net sales growth rate will likely show a sequential slowdown. The top line could fall in the second half of 2019.
  • The second-quarter EPS will likely mark a steep decline, which reflects cost headwinds and tough YoY comparisons.

Kellogg (K) is scheduled to report its second-quarter earnings on August 1. We expect the second quarter to remain weak. The sales growth rate will likely show sequential deceleration. Also, the adjusted EPS will likely register a sharp decline.

Will Kellogg Post Weak Q2 Results?

We expect continued weakness in the base business to hurt Kellogg’s organic sales. However, the higher net price realization and brand investments could support the company’s organic sales growth. The organic sales growth will likely stay low. The revenues will likely improve YoY (year-over-year). However, Kellogg’s growth rate could show a sequential slowdown due to tough comparisons and unfavorable foreign exchange rates.

Kellogg’s profit margins could continue to fall, which reflects the negative mix and cost headwinds. The unfavorable mix due to the consolidation of low-margin Multipro’s operations will likely hurt the company’s margins. Higher brand marketing investments, distribution costs, and packaging costs are expected to take a toll on the margins.

Soft organic sales, weak margins, and pressure from interest expenses could hurt Kellogg’s EPS. The company faces tough comparisons, which will likely remain a drag. During the second quarter of 2018, Kellogg’s adjusted EPS marked double-digit growth, which reflected a lower effective tax rate.

Analysts’ projections

Analysts expect Kellogg to post net revenues of $3.41 billion in the second quarter. The estimate reflects 1.4% growth YoY. However, the expected sales growth rate shows a sequential slowdown. In the previous quarter, Kellogg’s top line increased 3.5%.

Analysts expect Kellogg’s margins to stay low and impact its bottom line. The company’s earnings decline rate will likely be worse compared to the first quarter. Analysts expect Kellogg to post an adjusted EPS of $0.92 in the second quarter, which implies a decline of 19.3% YoY. Kellogg’s EPS fell 17.9% in the first quarter.

Kellogg’s stock performance

So far, Kellogg stock has underperformed the benchmark index and most of its peers this year. A weak sales growth rate and pressure on earnings dragged the stock down. Kellogg stock has risen about 2% on a YTD (year-to-date) basis as of July Tuesday.

Hershey, General Mills, Conagra Brands (CAG), Mondelēz, and J.M. Smucker (SJM) shares registered YTD growth of 37.4%, 34.5%, 36.7%, 36.9%, and 20.5%, respectively. Higher pricing, cost-savings, and moderating input costs drove the companies’ stocks prices.

Outlook

Kellogg’s top line will likely decline in the second half of 2019. The company will annualize Multipro’s acquisition, which will likely limit the net sales. Negative currency rates could continue to hurt. Analysts expect a mid-single-digit decline in Kellogg’s revenues in the second half of 2019.

Despite soft net sales, Kellogg’s management expects organic sales to improve sequentially. Higher selling prices and brand investments are expected to support the company’s organic sales. Multipro will also contribute to the underlying sales.

Kellogg’s profit margins will likely improve in the second half of 2019 due to ongoing cost inflation. Input cost inflation will have less pressure on margins. Growth in organic sales, easing pressure on margins, and share repurchases will likely cushion the company’s earnings. We expect a moderation in the EPS decline rate.

Despite an expected improvement in the base business, the upside in Kellogg stock seems limited. The company’s EPS will likely decline in 2019, which reflects weakness in the first half. Analysts expect about 5% growth in the company’s 2020 EPS.

Notably, Kellogg trades at a forward PE ratio of 15.2x. In comparison, Conagra Brands stock trades at a lower valuation multiple. Conagra Brands stock offers better EPS growth in the coming quarters.

Most of the analysts recommended a “hold” on Kellogg stock. The target price is almost on par with the closing price of $58.21 on July Tuesday.