BMO Dives Deep Into Kellogg's Q2 Earnings

BMO maintains its Market Perform rating on Kellogg Company (NYSE: K) after it reported an in-line EPS for the second quarter, but sales continued to fall short of expectations.

Kellogg cut its 2016 EPS estimate range to $3.58–$3.65 from $3.64–$3.71, as lower sales and higher FX penalty will more than offset greater ZBB savings, contribution from Venezuela pricing, and a lower tax rate.

However, despite reducing its long-term sales growth to flat, Kellogg accelerated its realization of 18 percent operating margins to 2018 from 2020 due to a ramp up in cost savings.

Related Link: If Kellogg Can Show Signs Of A Sustainable Turnaround, Argus Would Consider An Upgrade

Meanwhile, BMO view the company's $450 million–$500 million in incremental savings outside of ongoing productivity program as conservative.

"With 60 percent variable gross margin, we estimate that 100 basis points of sales growth translates into $70 million in operating profit," analyst Kenneth Zaslow wrote in a note.

Zaslow said though the company has the ability to achieve its operating margin target, it faces material macro and even brand challenges across its global portfolio.

As such, the analyst cut his 2016 EPS estimate by $0.08 to $3.62, while raising 2017 estimate by $0.07 to $4.06.

At time of writing, shares of Kellogg were up 0.40 percent to $82.75. Zaslow also increased his price target by $10 to $85.

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