Kellogg Still Should Smell Good to Investors

by Tom Taulli | April 23, 2012 12:19 pm

Kellogg (NYSE:K[1]) 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[2] — 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[3] 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[4]) was going to purchase the company from Procter & Gamble (NYSE:PG[5]). However, the company disclosed irregularities in its accounting[6], 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[7]), 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”[8], “All About Short Selling”[9] and “All About Commodities.”[10] Follow him on Twitter at @ttaulli[11] or reach him via email[12]. As of this writing, he did not own a position in any of the aforementioned securities.

Source URL: https://investorplace.com/2012/04/kellogg-still-should-smell-good-to-investors/

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