Kellogg raised its outlook, however fundamentals might have reached a ‘excessive watermark’, says analyst
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Kellogg Co., which reported third-quarter outcomes earlier than the market opened on Thursday, may face pricing and provide chain pressures in 2023, in line with Bernstein analyst Alexia Howard.
The cereal large reported revenue and gross sales that beat expectations, and raised its full-year outlook, citing energy in snacks and rising markets.
However Kellogg’s
Okay,
inventory fell 9.2% in afternoon buying and selling towards a greater than four-month low, outpacing the S&P 500 index’s
SPX,
decline of 0.5%.
In a word, Bernstein’s Howard mentioned whereas Kellogg’s outcomes had been “typically shipshape,” he questioned whether or not this was the “excessive watermark” for the corporate’s fundamentals.
See Now: Kellogg raises full-year revenue and income outlook, amid energy in snacks and rising markets
“We stay involved that if enter prices and provide chain pressures stay intense in 2023, and pricing maybe turns into tougher to come back by as retailers search to hit sharper worth factors to retain a weakening client, the margin and general revenue tendencies may deteriorate subsequent yr,” Howard wrote. “Whereas margins have been down up to now, gross revenue {dollars} have continued to develop attributable to a strong prime line and higher than anticipated worth elasticity, however this might unravel if customers lose endurance with additional worth will increase.”
Kellogg’s third-quarter adjusted gross margin was 30.7%, down from 32.2% within the prior yr’s quarter.
The analyst additionally pointed to the potential impression of the Excessive Fats Sugar and Salt (HFSS) initiative within the U.Okay, which locations restrictions on promotions of merchandise excessive in fats, sugar, or salt.
He additionally famous the U.S. Meals and Drug Administration’s stringent new proposed definition of wholesome meals. By updating “wholesome” claims on meals labels, the FDA desires to cut back the burden of continual illness and advance “well being fairness,” in line with the company. Whereas this may occasionally take a while to work its approach by to voluntary pointers and entrance of pack labels, the well being and wellness theme might re-emerge and stress the cereal class within the U.S. over time, Howard warned.
“This all begs the query of how the proposed [Kellogg company] cut up will play out in 2024,” Howard added. Kellogg is planning to separate into three completely different firms, a transfer which it says shall be full by the tip of 2023.
See Now: Kellogg says firm veteran Gary Pilnick will head cereal enterprise upon cut up
Bernstein reiterated its underperform ranking and $55 worth goal for Kellogg’s inventory, which means about 20% draw back from present ranges.
The corporate’s inventory has risen 6.9% this yr, in contrast with the S&P 500’s decline of 21.5%.
Of 21 analysts surveyed by FactSet, three have an chubby or purchase ranking, 14 have a maintain ranking, and 4 have an underweight or promote ranking on Kellogg.
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