Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Kellogg Earnings Analysis: Understatement of Reported Net Income?

Kellogg Earnings Analysis

Yesterday, Kellogg Company (NYSE:K) reported preliminary financial results for the quarter ended 2013-09-30 (full transcript). Stocks in the food processing industry have seen an overall increase of over 35%this year while Kellogg stock has only seen a year-to-date change of over 12%. Kellogg operates as a food manufacturing company. Its brands include Kellogg’s, Keebler, Pop-Tarts, Eggo, Cheez-It, Nutri-Grain, Rice Krispies, Murray, Austin, Morningstar Farms, Famous Amos, Carr’s, Plantation, Ready Crust and Kashi, which are manufactured in 18 countries and marketed in more than 180 countries.

Kellogg Company (NYSE:K)

Our peer-based analysis of Kellogg Company (peer set at the end of the post) looks at the company’s performance over the last twelve months (unless stated otherwise). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.

Quarterly (USD million) 2013-09-30 2013-06-30 2013-03-31 2012-12-31 2012-09-30
Revenues 3,718.0 3,716.0 3,862.0 3,564.0 3,720.0
Revenue Growth % 0.1 (3.8) 8.4 (4.2) 7.1
Net Income 326.0 352.0 311.0 (32.0) 296.0
Net Income Growth % (7.4) 13.2 N/A (110.8) (1.7)
Net Margin % 8.8 9.5 8.1 (0.9) 8.0
ROE % (Annualized) 48.4 52.7 47.8 (5.3) 51.6
ROA % (Annualized) 8.6 9.3 8.2 (0.9) 8.0

Valuation Drivers

Kellogg Company’s current Price/Book of 8.0 is about average in its peer group. Kellogg’s operating performance is higher than the average of its chosen peers (ROE of 36.3% compared to the peer average ROE of 23.8%) but the market does not seem to expect higher growth relative to peers (PE of 23.9 compared to peer average of 23.9) but simply to maintain its relatively high rates of return.

The company’s asset efficiency (asset turns of 1.0x) and net profit margins of 6.4% are both average for its peer group. Kellogg’s net margin is its lowest relative to the last five years and compares to a high of 10.1% in 2010.

Long-term strategic bet

While Kellogg’s revenues growth has been below the peer average in the last few years (4.1% vs. 6.3% respectively for the past three years), the market still gives the stock an about peer average PE ratio of 23.9. The market seems to see the company as a long-term strategic bet.

Kellogg’s annualized rate of change in capital of 13.0% over the past three years is around its peer average of 15.3%. This average investment has likewise generated a peer average return on capital of 14.2% averaged over the same three years. This average return on investment implies that company is investing appropriately.

Kellogg Earnings Quality– Possible Understatement of Net Income?

Kellogg’s net income margin for the last twelve months is around the peer average (6.4% vs. peer average of 6.6%). This average margin and relatively conservative accrual policy (5.5% vs. peer average of 4.2%) suggests possible understatement of its reported net income.

Kellogg’s accruals over the last twelve months are positive suggesting a buildup of reserves. In addition, the level of accrual is greater than the peer average — which suggests a relatively strong buildup in reserves compared to its peers.

Trend Charts for Kellogg Company (NYSE:K)

Kellogg Earnings Analysis (NYSE:K) Quarterly and Annual Revenues Trend Chart

Kellogg Earnings Analysis (NYSE:K) Quarterly and Annual Net Margin Trend Chart

Kellogg Earnings Analysis (NYSE:K) Quarterly and Annual Accruals Trend Chart

Peers used for Kellogg Earnings Analysis

Kellogg Earnings Analysis used the following peer-set: PepsiCo, Inc. (NYSE:PEP), Mondelez International Inc (NASDAQ:MDLZ), General Mills, Inc. (NYSE:GIS), Flowers Foods, Inc. (NYSE:FLO), The Hain Celestial Group, Inc. (NASDAQ:HAIN) and TreeHouse Foods Inc. (NYSE:THS).


Biotech Stock Alert - 20% Guaranteed Return in One Year

Hedge Funds and Insiders Are Piling Into

One of 2015's best hedge funds and two insiders snapped up shares of this medical device stock recently. We believe its transformative and disruptive device will storm the $3+ billion market and help it achieve 500%-1000% gains in 3 years.

Get your FREE REPORT and the details of our 20% return guarantee today.

Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.
Loading Comments...

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 102% in 3 years!! Wondering How?

Download a complete edition of our newsletter for free!