Kellogg (NYSE:K) bills itself as the "world's leading producer of cereal and a leading producer of convenience foods, including cookies, crackers, toaster pastries, cereal bars, fruit-flavored snacks, frozen waffles and veggie foods" Like most food companies, it operates in a wide array of product categories. The company is currently facing headwinds from high commodity costs, which dented first-quarter profits, but sales came in higher than expected. Over the long haul, the company should continue to leverage moderate sales growth into much higher profit expansion, and a decent dividend yield should push total potential investor returns to appealing levels. (For related reading, check out Why Food Is Still Cheap In America.)
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Kellog's First-Quarter Recap
In the first quarter of 2011, Kellogg's net sales improved by 5% to reach $3.5 billion. Sales in North America advanced 4% to account for 68.6% of the total top line. Management cited strength in new cereal launches, snack products and frozen food, such as "momentum in the Eggo business," as the key drivers of this growth. Kellogg competes primarily with General Mills (NYSE:GIS) and Ralcorp (NYSE:RAH) in the cereal category, PepsiCo (NYSE:PEP) in the snack food space, and Sara Lee in frozen foods (NYSE:SLE), although these and other food firms compete in a wide array of categories and have similar product offerings.
International sales made up the rest of Kellog's sales, jumping 8%, although positive currency fluctuations accounted for 6% of the growth. In addition, 2% of sales growth stemmed from organic or internal means and was attributed to double-digit growth in Latin America and a modest improvement in the Asia Pacific region.
Higher commodity costs and expenditures toward brand building caused operating income to decline 10% to $572 million, or 16.3% of sales. Interest and income tax expense fell, but net income still dropped 12.4% to $366 million. Share buybacks tempered the per-share decrease as earnings fell 8.3% to $1 per diluted share. This fell 4 cents below analyst projections.
Sales trends are coming in higher than expected, but profits are lower than expected. As a result, management upped its full-year sales guidance and now projects 4% growth. It expects operating profits to range between flat and down 2% and currently expects earnings between $3.33 and $3.40 per share. Positive currency fluctuations could add 9 cents to this figure.
The Bottom Line
Despite the commodity cost headwinds, shares of Kellogg have trended upward and are bumping up against their highs over the past year. At the current price, they trade at a forward P/E of almost 17, assuming the company hits the high end of its guidance range.
Over the past decade, Kellogg has managed to leverage 6% average annual sales growth to annual profit growth of just over 8.5%. Combined with a current dividend yield of 2.9%, investors should be able to garner double-digit annual returns by investing in the stock over the long haul. (For related reading, also take a look at America's Biggest Food Companies.)
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