Susquehanna Reaffirms Their Hold Rating on Kellogg

By Carrie Williams

In a report released yesterday, Pablo Zuanic from Susquehanna reiterated a Hold rating on Kellogg (NYSE: K), with a price target of $78. The company’s shares closed yesterday at $73.49.

Zuanic observed:

“K reaffirmed guidance (-3% LFL sales for 2017) even though it implied the poor start to the year seen in 1Q would linger in part in 2Q. It remains confident on delivering ~18% EBIT margins by 2018 (3.5-point gain from the 2015 base), as part of Project K and ZBB savings are reinvested and part flow to the bottom line. While top-line trends (as reflected by the latest scanner data through 6/4) for now point to little improvement, we think the reinvestment in brand building and innovation plus product/brands changes (repositioning of Special K, reformulating snack bars, focused strategy on fewer snack brands), and increased emerging market exposure, should all lead to better top-line trends in the future. We have only tweaked estimates (we are 1% above consensus for FY17-18 EPS on cost-savings visibility), and have left the December ’17 price target at $78 (which takes a 5% peer discount using our tax-adjusted EBITDA methodology). K shares are flat YTD vs. +10% for consumer staples (S5CONS) and 9% for SPX; only GIS, CPB, and HAIN have performed worse in Food. The poor start to 2017 and 1Q guidance cut explain the underperformance. Still, if sales trends improve in 2H and margin targets are delivered, the stock could be interesting. In that scenario the current 12% 1yF P/E discount may not be warranted. Also, perhaps we should not totally rule out “transformative optionality” in valuing the stock (the WK Kellogg Foundation only owns a 19% stake; 11 of 13 directors are deemed independent; only four of 13 directors have been with Board over five years including the two non-independent ones).”

According to TipRanks.com, Zuanic is a 2-star analyst with an average return of 0.8% and a 43.4% success rate. Zuanic covers the Consumer Goods sector, focusing on stocks such as Constellation Brands Inc, Anheuser-Busch Inbev Sa, and Mondelez International.

Kellogg has an analyst consensus of Hold, with a price target consensus of $78.

Based on Kellogg’s latest earnings report for the quarter ending March 31, the company posted quarterly revenue of $3.26 billion and quarterly net profit of $262 million. In comparison, last year the company earned revenue of $3.4 billion and had a net profit of $175 million.

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Kellogg Co. engages in the manufacturing, marketing, and distribution of cereal and convenience foods, including cookies, crackers, toaster pastries, cereal bars, frozen waffles, and meat alternatives. It operates through the following segments: U.S. Morning Foods, U.S. Snacks, U.S. Specialty, North America Other, Europe, Latin America, and Asia Pacific. The U.S. Morning Foods segment includes cereal, toaster pastries, health and wellness bars, and beverages. The U.S. Snacks segment offers cookies, crackers, cereal bars, savory snacks, and fruit-flavored snacks. The U.S. Specialty segment represents food away from home channels, including food service, convenience, vending, Girl Scouts, and food manufacturing. The North America Other segment includes U.S. Frozen, Kashi, and Canada operating segments. The Europe segment consists of European countries. The Latin America segment comprises of Central and South America and includes Mexico. The Asia Pacific segment compose of Sub-Saharan Africa, Australia, and Asian and Pacific markets. The company was founded by Will Keith Kellogg in 1906 and is located in Battle Creek, MI.