Kellogg Earnings Beat Lifts Packaged Food Stocks

Snacks and frozen foods offset weak North American cereal sales

Kellogg Company (K) shares closed Tuesday's trading session up nearly 3% after the $21.42 billion cereal maker delivered third quarter (Q3) adjusted earnings of $1.03 per share on net sales of $3.4 billion. While both metrics topped consensus estimates, each declined 2.8% from the September 2018 quarter, primarily due to the company's July divestiture of its cookie, fruit snack, pie crust, and ice cream cone businesses.

However, quarterly organic sales – which remove the impact of currency fluctuations, divestitures, and acquisitions – grew 2.4%, driven by robust results in the company's snacks and frozen foods. From a geographic standpoint, organic sales rose 7.6% in Africa and Asia, 5.9% in Latin America, and 4.2% in Europe, but organic sales increased at a tepid 0.2% in North America owing to weak cereal sales. In other positives, the company's gross operating margin improved by 1% from the June quarter to reach 34.4%.

"Given the cautious view held by most investors we speak with on the name, we expect these results to be good enough to send the stock higher, especially in context of the 100-basis-point sequential improvement in gross margins and sustained organic sales momentum," Goldman Sachs analyst Jason English wrote in a research note cited by Barron's, following the earnings call. As of Oct. 30, 2019, Kellogg stock pays a 3.73% dividend yield and has returned 13.24% year to date (YTD). By comparison, the S&P 500 index has gained 21.14% so far this year.

Let's now turn to the technicals. A broad double bottom formed between March and June, with the share price then gapping to a 52-week high after the company issued surprisingly upbeat Q2 earnings. Price has since tracked mostly sideways but closed yesterday above the 50-day simple moving average (SMA) on above-average volume – a move that could fuel a rally to the prominent September 2018 swing high at $72.13. Those who take a trade should consider placing a stop-loss order below either yesterday's low at $61.55 or Monday's low at $60.65, depending on personal risk tolerance.

Chart depicting the share price of Kellogg Company (K)

Kellogg's encouraging results come on the back of mostly positive quarterly earnings reports released from General Mills, Inc. (GIS) and Conagra Brands, Inc. (CAG) last month. Below, we take a more detailed look at each company.

General Mills, Inc. (GIS)

With a market capitalization of $30.50 billion, General Mills manufactures and markets branded consumer foods, including snacks, cereal, convenient meals, yogurt, baking mixes, and pet food. The maker of Cheerios cereal reported fiscal Q1 2020 earnings of 79 cents per share to deliver a 2.6% earnings surprise and log a year-over-year (YOY) bottom-line improvement of 13%. However, the Minneapolis, Minnesota-based company's sales slumped 2.2% from the year-ago quarter amid weaker performance from its international segments. YOY growth of 7% in the firm's pet division, which includes its recently acquired company Blue Buffalo, provided a highlight. General Mills stock offers a healthy dividend yield of nearly 4% and is up 34.62% on the year, outperforming the packaged foods industry average by a whopping 29.82% as of Oct. 30, 2019.

The company's share price added most of its YTD gain between January and May, with the uptrend flattening out over the summer months. During October, the stock has retraced to $50, where price finds a confluence of support from a horizontal trendline and the 200-day SMA. Traders who open a long position here should anticipate a move back to crucial overhead resistance at $55 but be prepared to cut losses if the price closes below $49.

Chart depicting the share price of General Mills, Inc. (GIS)

Conagra Brands, Inc. (CAG)

Chicago-based Conagra Brands produces and sells food products, primarily in the United States. It operates through five business divisions: Grocery and Snacks, Refrigerated and Frozen, International, Foodservice, and Pinnacle Foods. The 100-year-year-old packaged foods company posted a fiscal Q1 2020 profit of 43 cents per share, surpassing Wall Street expectations of 39 cents per share; however, the figure contracted 8.5% on a YOY basis. Meanwhile, the company's top line grew 30.3% during the period, driven by contributions from its 2018 Pinnacle Foods takeover.

Conagra continues to grow its $2 billion snack business by expanding into new segments and refreshing retro brands with on-trend flavors and forms, such as its Slim Jim Savage meat stick that is three times thicker than the standard serving. Analysts have a 12-month price target on the stock at $32.21, representing 17% upside from Tuesday's $27.49 close. As of Oct. 30, 2019, the company's shares have a market value of $13.38 billion, yield 3.11%, and are trading almost 32% higher YTD.

Since trending higher for the first four months of the year, Conagra shares have remained stuck in a four-point trading range. A recent pullback to the range's lower trendline and the 200-day SMA at $27 provides a high-probability entry point for swing traders. Those who buy at current levels should set a profit target near the range's opposing side at $31, with a stop order placed somewhere below support at $27 to protect against further downside.

Chart depicting the share price of Conagra Brands, Inc. (CAG)
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