Kellogg Leaves a Funny Taste in My Mouth Heading Into Earnings

Thursday, Feb. 6, 2014 will likely be a big day for Kellogg (NYSE: K  ) . With a market cap of nearly $21 billion, the cereal maker is one of the largest food providers in the world. However, when the company reports earnings before the market opens on Thursday, will it get a little bigger or will poor operating results kill investors' enthusiasm for the business?

Mr. Market's expectations for the company are mixed
For the quarter, analysts expect Kellogg to report revenue of $3.52 billion. If this estimate turns out to be accurate, this will mean that revenue for the business has shrunk by 1% from the $3.56 billion it reported in the same quarter a year earlier. Despite the anticipated revenue shortfall for the quarter, matching estimates would bring the company's 2013 annual revenue to $14.8 billion, 4% higher than its 2012 revenue of $14.2 billion.

On the basis of profitability, though, Mr. Market has very different expectations. As opposed to seeing earnings per share contract alongside revenue, analysts believe that the company's profitability will jump by 17%. This would imply earnings for the quarter of $0.82 compared to the $0.70 management booked in the fourth quarter of 2012. Matching earnings estimates would bring the company's 2013 earnings per share to $3.76, 4% above the $3.61 it earned in 2012.

How does Kellogg stack up?
Over the past three years, Kellogg has seen its revenue rise 14.5%, from $12.4 billion to $14.2 billion. According to the company's most recent annual report, the primary drivers behind increased sales over this time frame have been three of its seven segments; U.S. Snacks, Latin America, and Asia-Pacific.

Between 2010 and 2012, the company's U.S. Snacks segment saw its sales rise an impressive 19%, from $2.7 billion to $3.2 billion. Its Asia-Pacific segment performed even better, rising by 20%, from $842 million to $1 billion, while its Latin America segment grew a whopping 21.5%, from $923 million to $1.1 billion. After all was said and done, these three segments made up 49% of the company's growth over this time frame.

In terms of profitability, though, Kellogg's situation has been downright dismal. Over the past three years, the company's earnings per share fell 21.5%, from $3.40 to $2.67. Despite benefiting from a slight decline in its selling, general, and administrative expenses as a percentage of sales, the business was hit by rising cost of goods sold. Between 2010 and 2012, the company's cost of goods sold rose from 56.9% of sales to 61.7%, which negatively affected its bottom line.

These results by Kellogg are so poor that General Mills (NYSE: GIS  ) , one of the company's largest competitors, has put the company to shame with its performance. Over its three most recent fiscal years, General Mills has grown its revenue by 19%, from $14.9 billion to $17.8 billion. While, like Kellogg, much of the growth experienced by General Mills has come from foreign sales, the company has been able to expand more aggressively. Between its 2011 and 2013 fiscal years, the business saw its International segment soar by 81%, from $2.9 billion to $5.2 billion.

In regard to its profitability, General Mills hasn't seen particularly attractive growth, but it has been far better than what Kellogg has been capable of. Over the past three years, General Mills has reported a 3% rise in its earnings per share, which rose from $2.70 to $2.79. This was due, in part, to the company's rising revenue, but also to lower interest expense and its selling, general and administrative expenses falling from 21.5% of sales to 20%.

Foolish takeaway
The past three years haven't been particularly kind to Kellogg. With that said, though, analysts believe that the company's revenue will continue to rise at a reasonable rate and that its bottom-line results will start to follow suit. While it is impossible to know what the outcome will be for the company beforehand, it appears as though General Mills might be a more attractive prospect for the long run. Not only has General Mills grown its revenue at a greater pace than Kellogg, but it's actually added value to shareholders in the form of rising profitability. I don't know about you, but to me that's a lot more appealing than slower revenue growth and declining earnings.

Despite Kellogg's lackluster results these past few years, the company does offer an attractive yield to shareholders.  But is the company one of the nine singled out by the Motley Fool for their rock-solid dividends? One of the dirty secrets that few finance professionals will openly admit is the fact that dividend stocks as a group handily outperform their non-dividend paying brethren. The reasons for this are too numerous to list here, but you can rest assured that it's true. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.


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