Kellogg Earnings: What's Happening Overseas?

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Kellogg (NYSE: K) is one of the leading food producers in the U.S. Shareholders have also been rewarded nicely over the past decade with an ever-increasing dividend and a gradual, but steady rise in the share price.  With the company due to report earnings next Monday, there will not be too many surprises, but investors will be listening for updates on how recent acquisitions are playing out.

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Kellogg is best known for its vast line of ready-to-eat cereals; however they also produce cookies, crackers, potato chips, cereal bars, fruit snacks, and frozen waffles using their brand names such as Eggo, Nutri-Grain, Keebler, Cheez-it, Famous Amos, and many others. 

Kellogg has been very active with acquiring brands and companies throughout their history, with such acquisitions as fellow cereal producer Kashi in 2000 and Keebler in 2001.  However, the most significant to investors currently is the company’s acquisition of the Pringles brand from Procter and Gamble last May for $2.695 billion.  This acquisition alone gives Kellogg the number two market share in savory snacks to PepsiCo, whose Lays, Doritos, and Cheetos brands are dominant in the snack food market.  With rising income and increased urbanization abroad, demand for convenient pre-packaged foods should increase across the board, greatly benefiting both companies.  One of Kellogg’s’ goals with the acquisition was to vastly increase its international business, which before the Pringles acquisition only accounted for 33% of the company’s sales.  I will be paying particular attention to the international sales numbers and outlook during the earnings call.

Speaking of international expansion, the company recently announced a joint venture with Wilmar International for the manufacturing, sale, and distribution of Kellogg’s brands in China.  Wilmar will contribute the infrastructure, supply chain, and distribution network in China and Kellogg will contribute their globally recognized brands.  This is an extremely exciting development for Kellogg, as China offers virtually unlimited potential to for expansion, with their astronomically high population and rapidly growing middle class.  This partnership is worth monitoring for investors, both during the company’s earnings report next week and beyond.

As I stated before, Kellogg is a nice dividend payer, currently yielding just over 3%.  Over the past decade the dividend has been gradually raised from $1.01 to its current $1.76 level, and I would be willing to bet on another increase this year; somewhere in the neighborhood of 7-8 cents per share would be reasonable to expect.  In addition to a good dividend, Kellogg has been very active with buybacks, spending $800 million in 2011 alone.  Since 2008, the number of outstanding shares has decreased from 385 million to 358.4 million, a 6.9% reduction.  The company still has about $587 million remaining in authorized buybacks, and I would be surprised if the company did not authorize additional buybacks.

Kellogg is decently valued for such a stable, established company, currently trading for 17.6 times 2012’s consensus earnings, which are expected to grow to $3.66 and $4.04 in 2013 and 2014, respectively, mostly due to increased international business.  So, Kellogg is projected to grow its earnings at 10.5% annually going forward, which I believe justifies the valuation.  In comparison, the other U.S. cereal giant, General Mills (NYSE: GIS) trades at 15.4 times 2012 earnings, but is not projected to grow earnings quite as fast, with 8.5% earnings growth projected.  Both of these companies have been great investments, but lately Kellogg has been a bit more ambitious with its growth plans.

In conclusion, Kellogg is a rock solid company, which thanks to China and other emerging markets, is just beginning to tap its potential.  More important than 2012’s earnings numbers themselves are the company’s report on its international progress, as much of what we know happened during 2012 and will not be fully reflected in the earnings numbers.

KWMatt82 has no position in any stocks mentioned. The Motley Fool recommends PepsiCo and Procter & Gamble. The Motley Fool owns shares of PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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