Kellogg Company Flexes Pricing Power
2022.05.06 10:58
Kellogg Company (NYSE:K) proved without a doubt that it and the consumer staples sector have pricing power. The company proactively raised its prices and was able to drive not only top-line growth but also margin preservation. In a world where consumers are being forced to ask themselves “do I buy what I want or what I need?”, pricing power is king, and when that power lies in an already attractive high-yielding dividend growth stock all the better. Kellogg isn’t quite the value it was a year or so ago but it is still a good buy at 16X its earnings and yielding 3.4%.
“We are pleased to report another quarter of solid results, getting off to a better start to the year than we had expected,” said Steve Cahillane, Kellogg Company’s Chairman, and Chief Executive Officer.
“The strength of our portfolio is evident, as we more than offset the sales and cost impact of supply recovery in North America cereal with sustained momentum in snacks growth around the world. Our ability to execute with agility was also on display, as we navigated through a challenging supply environment and delivered productivity and price realization amidst decades-high cost inflation.”
Kellogg Beats And Raises Guidance On Strength In Demand, Prices
Kellogg Company had a good quarter and one that could have been better if not for reduced inventory in North America related to a fire last year. That aside, the company reported $3.67 billion in net revenue for a gain of 2.5% over last year. The revenue is up 4.2% on an organic basis and is driven by momentum in the snack business as well as pricing and mix. All four regions are also driving results and aided the 220 basis points in outperformance relative to the Marketbeat.com consensus estimate. APAC led with a gain of 12% followed by an 8% increase in Latin America and low single-digit increases in North America and Europe.
Moving down, the company’s GAAP margin widened on a YOY basis but adjusted did not. The good news is that adjusted margins contracted much less than expected due to price increases and resulted in only a 0.1% decline in the adjusted earnings. The adjusted EPS of $1.10 beat the consensus by $0.17 and put the company on track to outperform its own guidance. As for the guidance, the company raised the guidance for revenue by 1% to 4% versus the consensus of 1.6% and kept the earnings outlook the same.
The best news in the report, however, is the cash flow. The company reports cash from operations is up to $327 million from last year’s $235 million with a greater than 200% increase in free cash flow. This is salient to the dividend which right now yields about 3.4% and comes with a history of growth. The company has been raising the dividend for the last 17 years but with a tepid 2% CAGR. With cash flow on the rise, we could see a larger than usual increase at the next distribution.
The Technical Outlook: Kellogg Could Break To Fresh Highs
Shares of Kellogg Company jumped more than 4.25% on the earnings news and guidance but met resistance at the $71.00 level. This is coincident with the post-COVID highs and may keep price action in check but we think not. Price action is supported by a healthy dividend and valuation as well as the results so may keep moving higher. Assuming the market breaks above the $71 level, we see it moving up to the pre-COVID highs near $75 if not higher.
Kellogg Stock Chart
