Kellogg Has Soggy Days Ahead

 | Nov 05, 2013 | 5:38 PM EST
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Boy, were Kellogg's (K) earnings and guidance depressing on Monday.

And not just for the company or for the food sector. The company echoed an extremely negative view on the entire economy voiced by competitor Kraft Foods (KRFT) last week. Kraft CEO Tony Vernon said in his company's conference call that shoppers "have little interest or minimal ability to buy more than what they need for a given week or even a given day." Vernon continued: "This is not an environment we or our industry ... can promote our way out of."

No wonder that Kellogg announced that it will cut 7% of its workforce by 2017 as part of a four-year cost-cutting plan intended to produce annual cost savings of $425 million to $475 million in 2018. The program, called "Project K," will result in $1.2 billion to $1.4 billion in restructuring charges during that period.

Four years.

That's neither a quick turnaround for a company or a ringing endorsement for growth in the global economy.

In the quarter, Kellogg beat Wall Street's earnings projections by $0.06 a share on revenue that dropped 0.1% year over year to $3.72 billion. (Wall Street was looking for $3.71 billion in revenue.)

For the full 2013 year, the company told Wall Street to expect earnings at the lower end of its previous guidance of $3.75 to $3.84 a share. Before the call, the analyst consensus had stood at $3.77 a share for the year.

Kellogg's company-specific challenges include a relatively small exposure to faster-growing (even if currently disappointing) emerging markets and consumer trends that are running against the company's core cereal business. Kellogg got 63% of its revenue from the U.S. in 2012. Latin America represented 8% of revenue, and the Asia Pacific region 7%. In the breakfast segment, Kellogg's cereals have run into the "protein, please" trend best exemplified in the boom for Greek yogurt.

The U.S. food group in general -- stocks such as Kellogg, Kraft, General Mills (GIS) and Campbell Soup (CPB) -- isn't especially cheap, despite the sector's troubles. Credit Suisse calculates that the group has traded at 20% P/E discount to home, personal care and beverage stocks over the last 20 years and a 10% discount over the last 10 years. The current discount, though, is just 7%.

Given the long time horizon of "Project K," I'd wait for a larger discount.

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