All Signs Point Toward a Bright Future for Kellogg

Kellogg is making the right moves to move beyond its troubled past.

Jun 18, 2014 at 7:00AM

Kellogg (NYSE:K) is among the world's leading cereal and convenience foods companies. The company's performance was challenged in recent years because of weak consumer spending and input cost inflation. However, the company is likely to expand its margins and earnings in the future due to an expected improvement in consumer spending, decreasing grain (inputs) prices, and increased productivity.

Dropping grain prices
Kellogg will perform better in the future because a drop in grain prices will likely result in gross margin improvement. Corn, wheat, and soybean oil prices recently trended downward. Since the beginning of May last month, prices for corn, wheat, and soybean oil dropped by 11%, 13%, and 11.5%, respectively.

The company expects  low single-digit inflation in 2014. Management believes the company will realize the benefit of the drop in grain prices in the ongoing second quarter, and expects it to result in gross margin expansion of 40-50 basis points in 2014.

Kellogg's margins should improve as key input prices fall, and because of this it can direct its input cost savings toward strengthening its product portfolio and increasing its advertisement and promotional spending. Kellogg could also opt to reduce prices across its product portfolio, which would augur well for its sales volume and market share in upcoming quarters. 

Kellogg's peers, including Post Holdings (NYSE:POST) and General Mills (NYSE:GIS), are also likely to benefit from a drop in input prices. Post Holdings expects modest net deflation in commodities in the back half of 2014, which is likely to result in gross margin improvement in the second half of 2014. In the recent first calendar quarter, the company observed a 2% decrease in cost of goods sold per pound, which will accelerate further in upcoming quarters due to the input price drop.

General Mills anticipates strong margin expansion in upcoming quarters, as it expects low inflation in the fiscal fourth quarter of 2014. General Mills expects full-year inflation of 3%. Aside from lower input prices, a lower share count and a lower tax rate will drive earnings growth. General Mills has repurchased 29 million shares for a total of $1.4 billion in fiscal 2014 YTD.

The future sales volumes of Kellogg, General Mills, and Post Holdings will also benefit from expected improvements in the U.S. GDP growth rate and consumer spending. The Fed expects U.S. GDP to grow by 2.8%-3% in 2014, in contrast to 1.9% in 2013.

Other earnings growth drivers
Aside from the drop in grain prices, Kellogg's productivity enhancement initiatives remain an important driver of its earnings growth. The company has been working on 'Project K', a $1.4 billion restructuring program, to improve productivity. It anticipates that Project K will result in annualized cost savings of $425-$475 million by 2018. The company is making progress on Project K and remains on track to achieve the target in 2014.

Under Project K, Kellogg generated savings of $15 million in 2013 and expects to generate incremental savings of $50-$60 million in 2014. In order to achieve the desired cost savings under Project K, the company has opted to reduce its workforce, close or reduce facilities in developed markets, and improve its supply chain and distribution in several emerging markets.

The cost savings that Kellogg expects to realize under the program will help expand margins and allow Kellogg to make brand-building investments for the long term. Kellogg is likely to start making these investments in the current second quarter and they will increase over time.

Moreover, the savings will allow the company to make investments consistent with the growth opportunities available throughout the world. Furthermore, management has guided that Kellogg is likely to repurchase 1.5%-2% of its current common shares outstanding, which will prove to be a tailwind for earnings-per-share growth; share repurchases are likely to have a positive impact of $0.08 per share on Kellogg's 2014 EPS.

Final take
Kellogg has struggled to deliver impressive returns for the past few years because of a weak consumer spending environment and input cost inflation. However, the future for Kellogg looks bright because of the drop in grain prices, expected improvements in the U.S. GDP growth rate, and the solid execution of Project K. The company will not only be able to expand its margins and earnings because of cost savings, it will also be able to make brand-building investments that will positively impact its performance in the long term. 

Warren Buffett's biggest fear is about to come true
Warren Buffett just called this emerging technology a "real threat" to his biggest cash-cow. While Buffett shakes in his billionaire-boots, only a few investors are embracing this new market which experts say will be worth over $2 trillion. It won't be long before everyone on Wall Street wises up, that's why The Motley Fool is releasing this timely investor alert. Click here to learn more about what's keeping Buffett up at night and the one public company we're calling the "brains behind" the technology.

Furqan Asad Suhail has no position in any stocks mentioned. The Motley Fool recommends Post Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers