Kellogg's Earnings Didn't Impress, Shares Remain Weak

Kellogg  (NYSE: K  ) , one of the largest packaged-goods companies in the world, has released fourth-quarter results last week that have caused negativity to set in. The stock has traded erratically since then, which is not what investors had hoped to see following the release. Let's take a look at the key statistics and find out if now is the time to buy Kellogg or if we should continue to avoid this beaten-down giant.

The cereal giant
Kellogg is the company behind brands such as Keebler, Special K, Pringles, Frosted Flakes, Pop Tarts, and many more. Kellogg describes itself as the world's leading cereal company, the second-largest producer of cookies and crackers, a leading producer of savory snacks, and a leading North American frozen foods company. Today, Kellogg operates facilities in 18 countries and has products available in more than 180.

Source: Kellogg.

The results
Kellogg released its fourth-quarter report for fiscal 2013 before the market opened on Feb. 6. The results were mixed compared to analysts' estimates:

Metric Reported Expected
Earnings per share $0.83 $0.82
Revenue $3.50 billion $3.52 billion

Kellogg's earnings per share increased 18.6% and revenue decreased 1.7% year over year, as sales in North America were weaker than expected. North American sales declined 2.8% and the company noted challenges in its developed cereal business as the primary reason for this. Sales were much more upbeat internationally, showing growth of 3% in Latin America, 1.2% in Europe, and 4.2% in the Asia-Pacific region. More than 64% of the company's total sales come from North America, so international success can only do so much to offset weakness in Kellogg's home market. Overall, this was a poor quarterly performance, and the company's outlook for 2014 did not help its situation.

The year ahead
In the report, Kellogg also gave its outlook for fiscal 2014, and it was far from impressive. Take a look at the expectations:

  • Earnings per share growth of 1%-3%
  • Revenue growth of approximately 1%
  • Operating profit growth of 0%-2%
  • Cash flow in the range of $1.0 billion-$1.1 billion
This dismal outlook following a dismal earnings report equated to an all-around disappointing quarter. Investors want to own a company because of its growth and upside potential, and this guidance shows that 2014 will not provide either for Kellogg. Had the report been bad while the outlook was good, we could have developed a bullish stance, but this wasn't the case. I would steer clear of Kellogg since there are countless better investment options in the market today.

Industrywide slowdown
Kellogg has not been the only company in the industry that has shown slowed growth; its largest competitor, General Mills (NYSE: GIS  ) , has had similar struggles, and this directly indicates an industrywide slowdown. General Mills is the company behind some of the world's most popular brands, including Betty Crocker, Pillsbury, Haagen-Dazs, Green Giant, and Cheerios. General Mills last reported earnings on Dec. 18, so here's a side-by-side comparison of what each company accomplished:

Metric Kellogg General Mills
Earnings Growth 18.6% (3.5%)
Revenue Growth (1.7%) 0%

As with Kellogg, international retail was the only segment to report year-over-year sales growth for General Mills, with a 2% increase. The other two segments were negative; U.S. retail sales declined 1% and convenience store and food-service sales fell 2%. However, unlike Kellogg, General Mills is bullish on the next few quarter. The company reaffirmed its full-year outlook and it expects earnings growth of 6.7%-7.8% from fiscal 2013. CEO Ken Powell followed up the outlook by stating, "As we enter the second half of fiscal 2014, we expect our earnings growth to accelerate from first-half levels." Kellogg could simply be acting cautiously, or General Mill's could be overly bullish, but I believe this gives investors a brighter outlook on the industry as a whole; this is where opportunity shines. With this said, I do not have a preference between Kellogg and General Mills from an investment standpoint, because both are great companies with strong brand mixes.

The Foolish bottom line
Kellogg has gone from a growth machine to a stalled giant over the last several quarters, and this can be seen in its latest earnings release. The results were mixed and they did not impress analysts or investors, sending shares lower. Today, the stock sits more than 12.5% below its 52-week high and sports a healthy 3.1% dividend, creating an attractive opportunity. It may take time for the industry to regain strength and push shares higher, but the dividend will pay investors to wait for that turn. General Mills is another great option in the industry, sitting 8.5% below its 52-week high with a 3.15% yield, so take a look at it if you are not sold on Kellogg.

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