NEW YORK — Credit Suisse has raised its earnings estimates and target share price for The Kellogg Co., citing more favorable foreign exchange conditions and “beyond normal” cost savings. The research and analytics firm has raised the target price for the Battle Creek, Mich.-based company’s stock to $86 per share from $82 per share, taking into account higher valuation multiples for packaged food companies. Rating Kellogg to “outperform,” Credit Suisse upgraded its outlook for first-quarter e.p.s. to 94c, which is in line with consensus, and full-year e.p.s. to $3.73, which compares with consensus of $3.71.
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| Robert Moskow, research analyst with Credit Suisse |
“We are also shifting the mix of our 3% organic sales growth estimate for the quarter and the year to take into account slightly less volume growth in North America and a slightly higher inflationary impact from Venezuela,” Robert Moskow, research analyst with Credit Suisse, noted in his report. “Kellogg remains our top large cap stock pick for 2016 owing to its unique visibility into cost savings, its heightened sense of urgency and signs of stronger execution in the company’s breakfast cereal business.”
Credit Suisse indicated first-quarter results will be “a positive catalyst” for Kellogg stock.
“While management in the past has tended to reinvest F/X upside back into the business rather than use it to raise guidance, the degree of ‘beyond normal’ cost savings in 2016 gives it enormous flexibility to raise guidance early,” Mr. Moskow noted. “The company has already called out $200 million of incremental savings for 2016 and probably has another $100 million to $150 million still to come as it rolls out zero-based budgeting internationally.
“We now expect 3.5% operating profit growth for the year, up from 3% previously. But the company could theoretically deliver 8% if it dropped the entire $200 million to the bottom line.”
Credit Suisse expects Kellogg North American sales to decline 1.5% in the first quarter, with low single-digit sales growth for Kellogg cereal and mid-to-high single digit sales growth for Pringles, Cheez-It and Pop-Tarts offsetting “problematic” performance of Nutri-Grain snack bars, Kashi and Morningstar.
“Consistent with management’s guidance that the U.S. business would not start the year at the same torrid pace it finished 2015; our Nielsen data indicated a 2% decline in measured channels in the U.S. in 1Q,” Mr. Moskow said. “However, the underlying health of the cereal business continues to improve as demonstrated by market share gains of 0.7 points in March compared to up 0.5 points for the 12-week period and 0.2 for the 52-week period.”
The firm also expects a 0.5% decline in Europe sales, reflecting continued weakness in cereal partially offset by strong growth in the Pringles brand and momentum for the cereal business in Russia. Credit Suisse predicts Latin American sales to increase 45%, driven by hyperinflationary conditions in Venezuela, 4% growth in Mexico, market share gains in Brazil and double-digit growth in snacks. In Asia Pacific, the firm forecasts 3% growth, as double-digit growth of cereal in Japan, Korea and Southeast Asia are dragged down by weakness in Australia.
