Staying on Track for the Back Half of 2006
Kellogg reporting solid results in 1Q2006 and 2Q2006 solidifies continuing growth for 3Q2006 and 4Q2006. We restate an Outperform position rating on Kellogg (K) after this past week's morning's reported earnings. Kellogg reported a $0.67 second quarter and sales were up an remarkable 7.2%. Although gross margin dropped 180 basis points due to higher input costs we believe that this will fade shortly. With a strong half and the year and past earnings we believe that growth in sales and EPS will continue for many quarters in the future.
We believe that Kellogg's fundamentals remain strong and this is seen when looking back to 4Q2005 when Kellogg reported strong earnings ahead of consensus. Cereal sales rose to 8% in the fourth quarter and for the entire year. Although there has been an increase in input inflation, we believe that Kellogg is managing it's way through the current quarter and this will remain consistent for the following year. This has been the second consecutive quarter in which Kellogg has surpassed both the consensus estimate and raised guidance. Kellogg's sales have risen in both volume and price/mix. This is uncommon especially for many other food companies. Kellogg is expanding it's market and at that time we were confident that Kellogg's fundamentals were strong and the firm's EPS would continue to grow.
After several meetings with management and investors, in the beginning of 2006, we believe that Kellogg will sustain earnings growth. There has been several important features that's should be emphasized as it maintains our fervor ...