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These 2 Factors Should Drive Kellogg's Growth In 2016

Kellogg Company K 0.38% reported its 1Q16 results ahead of expectations. Bernstein’s Alexia Howard maintained a Market-Perform rating for the company, while reducing the price target from $77 to $76. The analyst pointed out that Kellogg's key US Morning Foods business was back to recording sales declines.

Kellogg reported its 1Q16 comparable EPS at $0.97, beating the consensus expectation by 3 cents, but recording a 1 percent y/y decline. US cereals gained market share of 20bps, despite which sales of the US Morning Foods segment declined 1.2 percent in constant currency terms, analyst Alexia Howard mentioned.

Fueling Growth In 2016

Kellogg's prospects were mixed, Howard commented, elaborating that while top-line could be lackluster going ahead, growth in 2016 would be driven by Project K cost savings and zero-based budgeting cuts.

“After posting growth in the U.S. Morning Foods segment for the first time over the past two years in 4Q:15, comparable sales for the segment were down -1.2% this quarter, which begs the question of whether the recovery in U.S. cereals last quarter was more of an anomaly and not the beginning of a positive inflection point,” the analyst wrote.

Moreover, trends in US snacks continue to be lackluster, with comp sales down 2.6 percent y/y. The company indicated that the decline resulted from its recent DSD salesforce reorganization efforts.

In case the performance of US cereals remained sluggish as the year progressed, “more radical cost savings may have to be applied to the segment, and it sounds as though retailers may be beginning to reallocate shelf space away from traditional RTE cereals into more natural offerings,” Howard said.

Kellogg raised its FY16 guidance for currency neutral comparable EPS to $4.00-$4.07. Howard pointed out, however, that the upward revision was entirely due to “the rapid acceleration in price growth in Venezuela.”

DateFirmActionFromTo
Apr 2016CitigroupMaintainsBuy
Mar 2016Goldman SachsUpgradesSellNeutral
Feb 2016UBSInitiates Coverage onNeutral

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