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Kellogg Still Should Smell Good to Investors

Don't worry about Monday's earnings-driven drop-off — use it

   

kelloggs Kellogg Still Should Smell Good to InvestorsKellogg (NYSE:K) gave investors an upset stomach Monday as it cut full-year guidance because of weakness in the U.S. and Europe, mostly in the cereal categories).

However, with K stock off more than 5% in midday trading, the food company might present a nice buying opportunity.

Kellogg said it expects full-year earnings of $3.18 to $3.30 per share — which includes a charge of 6 cents to 11 cents per share from its $2.7 billion deal for Pringles — and it expects revenue growth of 2% to 3%. Both are short of Wall Street expectations for earnings of $3.48 and sales growth of 6%.

It shows just how quickly the environment can change. Just back in early February, Kellogg forecast net income to increase by 2% to 4% — at $3.18 to $3.30 per share, the company now is looking at a decline of 2% to 4%.

Kellogg’s preliminary first-quarter results also were lackluster. The company earned $1 per share and revenues were off by 1.3%. Kellogg will report its official earnings report on Thursday.

Despite all this, the company still is attractive. Of course, Kellogg houses iconic brands like Corn Flakes, Rice Krispies and Eggo. The company also has seen continued innovation in terms of better packaging and flavors. Take a look at Kashi, which is a leading brand in the healthy foods category. Kellogg continues to offer new products in the segment, which continues to grow at a nice pace.

But perhaps the biggest driver for Kellogg will be the deal for Pringles. Originally, Diamond Foods (NASDAQ:DMND) was going to purchase the company from Procter & Gamble (NYSE:PG). However, the company disclosed irregularities in its accounting, which torpedoed the deal — and Kellogg didn’t waste time stepping in.

And despite the charge, the deal looks spot-on. Pringles has higher margins than the cereal business and will catapult Kellogg to the No. 2 spot in the snack category (the leader is PepsiCo (NYSE:PEP), which boasts the enormous Frito-Lay business).

Pringles also will have synergy with Kellogg’s own snack properties, such as Keebler and Cheez-It. And Kellogg should benefit from Pringles’ growth opportunities in Asian markets.

If anything, the recent drop-off in Kellogg’s is an opportunity for long-term investors to buy in at a cheaper valuation. Monday’s drop-off sent K shares to their lowest price since the Pringles deal was announced in mid-February, and they now trade around 15 times earnings.

And while you’re waiting for Kellogg to right the ship, K shares will throw off about 3.4% in dividends — not a bad price for patience.

Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “The Complete M&A Handbook”“All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2012/04/kellogg-still-should-smell-good-to-investors/.

©2014 InvestorPlace Media, LLC

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