Kellogg and the Myth of Safe Stocks

Part of what we do here at The Motley Fool is try to dispel common market myths that might cost you money. Seeing that Kellogg (NYSE: K  ) reported earnings today, now's as good a time as any to attack the "safe stock" myth.

First off, Kellogg is a top-notch food company, even if this quarter wasn't quite so hot. Sales were up about 7% on a 4% rise in volume. Gross margins were down, though, and operating income was down 2% as reported (but up slightly if you back out foreign exchange and stock options). Though net earnings were up 3% as reported and reported per share earnings rose 8%, I wouldn't say that the company is really on fire right now.

So, here's the thing on "safe stocks" -- they're not necessarily so. Oh sure, you pick up a stock like Kraft (NYSE: KFT  ) , Kellogg, Hershey (NYSE: HSY  ) , or General Mills (NYSE: GIS  ) and you probably don't have much reason to be worried about a major drop in sales. After all, people buy cereal, crackers, cheese, and chocolate no matter what happens. And they're not as vulnerable to cyclicality as say Tyson Foods (NYSE: TSN  ) .

But what's "safe" when packaging costs keep going up? What's "safe" when transportation and fuel costs are so high? What's "safe" about the possibility that a large-scale move to ethanol production could theoretically alter the pricing structure in grains? Nope, I don't think food stocks are automatically safe -- not when companies like Kellogg see their cost of goods rise 11% in a quarter.

Now if you stretch out your investing horizon, some of this near-term pain doesn't matter so much. Input prices will either go back down or Kellogg will figure out how to pass them on through to the customer. But in the meantime, it certainly takes a bite out of profits and available cash flows.

As I said, Kellogg is a very good food company -- it's gaining share and it has a good operational record. I don't think it's a bad place to hunker down if you're really worried about what economic conditions may do to consumer and industrial demand. But just realize that profits won't really take off until costs start to back down.

For more Foolish food for thought:

Kraft is aMotley Fool Income Investorrecommendation.To discover more promising stocks with dynamic dividends, sign up today for a free 30-day guest pass.

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).


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