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Will Q1 Earnings Hold a Surprise for Kellogg (K) Stock?

Kellogg Company K is set to report first-quarter 2016 results on May 5, before the market opens. Last quarter, the company delivered a positive earnings surprise of 5.33%.

The cereal and snacks company delivered positive earnings surprises in each of the past four quarters with an average surprise of 3.84%.

Let’s see how things are shaping up for this announcement.

Factors to Consider

Kellogg has been struggling to grow sales over the past two years mainly due to weak performance by its cereals in developed markets as well as a soft U.S. snacks businesses owing to lower demand. To this end, the company has invested in brand building, in-store capabilities and product and packaging innovation as well as reformulation of many existing products.

Moreover, cost savings from its re-structuring program, Project K, are being deployed for renovation, innovation and brand support, which led to better-than-expected sales trends in 2015, especially in the U.S. cereal businesses. We expect the positive trend to continue in the soon-to-be-reported quarter as well.

Given the improved cereal trends witnessed in 2015, management expects the U.S. Cereal business to grow a couple of percent in 2016. The overall Morning Foods business is expected to see moderate growth in 2016.

The Pringles snacks business also did well last year. We expect these trends to continue in the first quarter as well.

Moreover, improved organic sales growth and strong Project K cost savings have boosted margins despite higher investments in food and brand building. We expect further improvement in margins in the first quarter.

However, the U.S. snacks business remains a drag. Also, with almost all the foreign currencies deteriorating in comparison with the U.S. dollar, currency translations have proved to be a significant headwind of late. This is likely to limit revenue growth to some extent.

Earnings Whispers

Our proven model does not conclusively show that Kellogg is likely to beat earnings this quarter. That is because a stock needs to have both a positive">Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below.

Zacks ESP: The Earnings ESP is -2.15% as the Most Accurate estimate stands at 91 cents and the Zacks Consensus Estimate is pegged higher at 93 cents.

Zacks Rank: Kellogg has a Zacks Rank #2. However, a negative ESP complicates surprise prediction.

We caution against Sell-rated stocks (Zacks Rank #4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Some stocks in the consumer staples sector that have both a positive Earnings ESP and a favorable Zacks Rank include:

Pinnacle Foods Inc. PF with an Earnings ESP of +5.00% and a Zacks Rank #3.

Hormel Foods Corp. HRL with an Earnings ESP of +5.26% and a Zacks Rank #1.

Nu Skin Enterprises Inc. NUS with an Earnings ESP of +8.11% and a Zacks Rank #2.

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NU SKIN ENTERP (NUS): Free Stock Analysis Report
HORMEL FOODS CP (HRL): Free Stock Analysis Report
KELLOGG CO (K): Free Stock Analysis Report
PINNACLE FOODS (PF): Free Stock Analysis Report
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