Kellogg (NYSE:K), the global provider of packaged food products, has watched its stock rise over 7% year to date, far outperforming the overall market. A strong earnings report could help push shares even higher, and first-quarter results are due out in a couple of days. Let's take a look at the most recent earnings release, expectations for the upcoming report, and take a glance at its largest competitor, General Mills (NYSE:GIS), to determine if we should be buying into this rally and holding on for the long-term, or if we should avoid the stock for now.

Source: Wikimedia Commons.

The February mixer
On Feb. 6, Kellogg released its fourth-quarter report to complete fiscal 2013, and the results were mixed compared to expectations. Here's a breakdown:

Earnings Per Share $0.83 $0.82
Revenue $3.50 billion $3.52 billion

Source: Benzinga.

Kellogg's earnings per share increased 18.6%, and revenue decreased 1.7% year over year, as sales in North America, its largest region, were much lower than expected. North American sales fell 2.8%, led lower by the Morning Foods and Snacks segments, and the company noted "challenges" in its developed cereal business.

Source: Frosted Flakes.

The company's products performed much better internationally, with revenue growing 4.2% in the Asian Pacific, 3% in Latin America, and 1.2% in Europe. This likely helped keep gross profit flat year over year at $1.4 billion, while reduced expenses led to the gross margin expanding 60 basis points to 39.4%.

Overall, it was a good quarter for Kellogg, but continued weakness in North America cast a dark cloud over the results. However, investors turned a blind eye to the negative sales growth and sent the stock 0.64% higher in the trading session. Shares have continued rallying in the months since, now sitting over 9% higher than they were before the results were announced. 

Expectations and what to watch for
First-quarter results are due out before the market opens on May 1, and the current analyst estimates project negative growth. Here's an overview:

MetricExpectedYear Ago
Earnings Per Share $0.98 $0.99
Revenue $3.82 billion $3.86 billion

Source: Estimize.

These expectations call for earnings per share and revenue to decrease 1% year over year; this seems well within reach for a company like Kellogg, even with the recent struggles in North America, but there are three other statistics that are just as important as the key metrics that you will want to watch for:

Source: Kellogg.

  1. It will be crucial for Kellogg to provide guidance for the second quarter that is within or above analysts expectations; currently, the consensus estimates call for earnings per share of $1.08 and revenue of $3.75 billion, which would represent year-over-year growth of 8% and 1%, respectively.
  2. While second-quarter guidance is crucial, it will be just as important for Kellogg to maintain its guidance for the full year of fiscal 2014. In the fourth-quarter report, the company said it expects earnings per share to grow 1%-3% and revenue to grow approximately 1% compared to fiscal 2013. There is really no room for error in this guidance, because even the slightest reduction could mean negative growth on both the top and bottom lines for the year.
  3. Last, but not least, investors will want to watch for the amount of free cash flow generated during the quarter. Kellogg said it anticipated free cash flow of $1.0 billion-$1.1 billion for the full year and added that it planned to use it to repurchase shares at an accelerated rate and pay its 3%+ dividend. For a company seeing slowed growth, share repurchases are key because it reduces the amount of shares outstanding, which boosts earnings per share and makes the remaining shares more valuable.
The earnings estimates seem attainable, and the company could easily satisfy the three elements above, but I would be cautious about placing a new investment right now. I would wait for a better entry point, because the shares have already rallied over 8% year to date, and the company expects to see very little growth for the full year, making me feel like any good news is already priced in. 

How has the competition fared?
Back on March 19, General Mills released earnings results for its third-quarter ending on Feb. 23. This report will give us a strong feel for what to expect from Kellogg, so let's take a detailed look at what was accomplished:

Earnings Per Share $0.62 $0.68
Revenue $4.38 billion $4.46 billion

Source: Benzinga.

General Mills' earnings per share decreased 6.1% and revenue fell 1.2% year over year, missing analyst expectations on both lines. Sales in the United States were very weak, with its U.S. Retail and Convenience Stores segment showing revenues down 2%, and the Food Service segment showing revenues down 7%.

Source: General Mills.

"Severe winter weather" was used as an excuse for the poor results in the U.S., but the last time I checked, people do not stop eating during times of bad weather; in fact, people would likely purchase additional pre-packaged and shelf-stable foods, like cereals and canned goods, to prepare for the possibility of being stuck in their homes for an extended period of time without electricity. I just think Americans are being more picky with what they feed their families, and General Mills' products are not atop shopping lists.

Sales with much better internationally, just like Kellogg showed in its last quarterly release, led by revenue growth of 17% in Latin America and 14% in the Asian-Pacific; however, international sales only make up about 30% of General Mills' total revenue, so this great performance could only provide a small boost.

In summary, General Mills' negative growth in both earnings and revenue was far from impressive and is a bad indicator for Kellogg; this further supports the idea of avoiding an investment right now.

The Foolish bottom line
Kellogg is a great American company, but it has experienced slowed sales in its home country, and it does not expect to see much earnings growth in fiscal 2014. The company is scheduled to release first-quarter results in a few days, and after the quarter we saw from General Mills in March, I would avoid placing an investment today. Foolish investors should simply monitor the stock in the coming days and wait for the earnings results to come out to make an educated decision on whether or not to invest using the most up-to-date financial information.