Kellogg's Strong Sales Offset Higher Costs


Kellogg, the world's biggest maker of breakfast cereal, Monday reported a 9 percent rise in quarterly profit, but forecast 2008 earnings below analysts estimates and its stock fell 3 percent.

Like many food companies, the maker of Frosted Flakes cereal, Eggo waffles and Keebler cookies has been hit by soaring costs for wheat and other ingredients. At the same time, it boosted spending on advertising and has earmarked investments that are expected to save money in the long-term.

Even with the benefit of the weaker dollar, which boosts the dollar value of sales in other currencies, the company still faces uncertainty in 2008, Morningstar analyst Gregg Warren said.

"Sure, they're going to get some benefit from international, but especially when wheat is your big cost, you don't want to say we're going to do stellar numbers next year and it's going to be fantastic, because you really don't know," Warren said.

Net income was $305 million, or 76 cents per share, compared with $281 million, or 70 cents, a year ago. Analysts on average forecast 73 cents, said Reuters Estimates.

Last month, top rival General Mills said a recent move to reduce the size of its cereal boxes and charge consumers more per ounce led to an 8.2 percent rise in quarterly profit.

Kellogg's sales rose 6 percent to $3 billion. But internal sales, which exclude foreign exchange and other factors, rose 4 percent.

Kellogg expects full-year earnings of $2.72 to $2.75 a share, up from its previous forecast of between $2.71 and $2.74 per share. Analysts on average forecast $2.78, according to Reuters Estimates.

Cost inflation is expected to be about 32 cents a share for the year, up from a previous forecast of 26 cents to 30 cents a share, the company said.

North American sales rose 4 percent in the second quarter, with the company's retail cereal business unchanged compared with a year earlier, when retailers built up more inventory than normal.

International sales rose 12 percent. Kellogg benefited from weakness in the U.S. dollar. Excluding foreign currency and other factors, sales were up 5 percent.

For 2008, the company forecast earnings of $2.92 to $2.97 a share. Analysts on average forecast $3.05 a share, according to Reuters Estimates.

"Low guidance has become common in recent years as investors have become accustomed to 10 percent EPS growth from Kellogg," UBS analyst David Palmer said in a research note.

"While higher commodity costs and a stronger competitor in General Mills have been headwinds, international momentum and easy cereal comparisons should boost 2008 growth."

At Friday's close, Kellogg at about 18 times analysts' average 2008 earnings estimate, compared with a multiple of about 16 for General Mills.