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This Poor Performer Could Be a Healthy Pick for Your Portfolio

By Pratik Thacker – Mar 10, 2014 at 7:01AM

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What Kellogg's cost-cutting strategies, new products, and expansionary moves mean for you.

U.S. consumers seem to be getting conscious about their health, which has led to a change in their food preferences. Hence, there has been a shift in demand for cereals as consumers seek out yogurts, breakfast sandwiches, and smoothies as healthier options. This has led to a decline in cereal sales that has hampered cereal retailers' performance.

The result of all this is the weakening performance of Kellogg (K 1.35%), which is the largest cereal company in the U.S. Its fourth-quarter results once again disheartened investors as its top line failed to meet the consensus estimate.

Kellogg's mixed results
Kellogg's revenue dropped 1.7% from last year's quarter as the company clocked sales of $3.5 billion. The company's top line missed the Street's estimate by $0.02 billion, mainly due to weakness in U.S. snacks as well as its morning food business. Not only have Kellogg's rivals introduced new, healthy products to attract customers, other industry players such as cafes and restaurants have entered the breakfast segment.

For example, McDonald's and Starbucks have expanded their product portfolios by offering larger breakfast menus. Kellogg's rivals have also been trying to snatch away more customers. General Mills (GIS 3.23%) has introduced Greek yogurts and a number of other products. The Yoplait and Yoki Alimentos acquisitions in 2012 helped General Mills boost its revenue significantly.

However, both Kellogg and General Mills face other problems such as consumers becoming conscious about the GMO ingredients used in their cereals. Hence, both retailers have resorted to GMO-free products which should lure consumers. For example, General Mills announced that its original Cheerios do not contain GMO ingredients. Even Kellogg now provides 11 cereals which do not contain GMO ingredients. Its gluten-free Rice Krispies and Kashi cereals have become customer favorites.

On the other hand, peer Post Holdings (POST 2.03%) is taking a different approach to enhance its product portfolio and attract customers. It acquired Golden Boy Foods Ltd. and Dymatize Enterprises, LLC last month, expanding its product portfolio. Post also plans to buy Nestle's Musashi and PowerBar brands which will further expand its offerings into premium nutrition bars, gels, and powders. The company has been able to grow its top line through its acquisition strategy which is evident from its first-quarter results in which sales grew by 25% to $297 million.

Going further
Moving down to Kellogg's bottom line, its earnings increased 18.6% to $0.83 per share to surpass the estimate of $0.82 per share. The key reason for the growth in income was the cost-cutting initiatives taken by the food company. It has initiated a four-year restructuring plan called Project K which is expected to reduce costs by around $200 million per year. The program includes cutting down Kellogg's workforce by 7% and a number of plant closures before 2017. Hence, this undertaking is expected to bear fruit in the years to come.

Efforts planned
Apart from cost-saving initiatives, the cereal maker has been making a number of efforts to attract more customers and improve its performance such as new advertisements. For example, it plans to come up with an ad campaign which will promote the benefits of cereals but will not point out any particular brand.

Also, the company has been introducing a large number of new products such as a breakfast shake which contains all of the nutrients in a bowl of cereal. Also, its Kashi cereal and other GMO-free products are gaining popularity.

Moreover, the cereal maker also announced that cereals are still the best option for breakfast despite the popularity of new introductions. In fact, Kellogg has been eyeing international expansion and it has witnessed growth in the Europe and Asia-Pacific regions where sales grew 1.2% and 4.2%, respectively, over last year's fourth quarter.

Final thoughts
Although Kellogg is undergoing a difficult phase in which demand for cereals has been falling, its efforts look quite attractive and they should help it bring back lost customers. New products, expansionary measures, and a focus on customers' needs make Kellogg's future bright. Moreover, Kellogg's cost-saving measures should enhance its bottom line and expand its margins. Therefore, Kellogg's has a bright future and looks interesting enough for an investment.

Pratik Thacker has no position in any stocks mentioned. The Motley Fool recommends McDonald's and Starbucks. The Motley Fool owns shares of McDonald's and Starbucks. 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.

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