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April 23, 2012

Stock of the Day

Recommendation: Hold

Welcome to the Stock of the Day for April 23, 2012. We're going to start off the day on the right foot by digging into Kellogg Co. (K), the largest cereal maker in the United States. Back in February, Kellogg made headlines by acquiring Procter & Gamble Co.'s Pringles Business for a healthy $2.7 billion in cash. So, let's revisit the breakfast specialists' venture into the snack business and see whether this company can still be part of a well-balanced portfolio.

Company Overview: Kellogg Co. is best known for its line of cold breakfast cereals, which include popular names like Apple Jacks, Corn Pops, Frosted Flakes and Raisin Bran. Kellogg Co. employs over 30,000 worldwide across 18 countries, and its products are marketed in more than 180 countries. In the past decade, the company has been expanding past the cereal business through a series of high-profile acquisitions. In 2001, Kellogg acquired cookie and cracker manufacturer Keebler Company for $3.86 billion. Since then, the company has also acquired Famous Amos, Cheez-It as well as Kashi and Morningstar Farms. And, with its most recent acquisition of Pringles, Kellogg Co. is now the second largest snack food company, second only to PepsiCo (PEP).

Industry Breakdown: The Processed & Packaged Goods Industry is made up of 44 companies. Of those, Kellogg is third-largest in terms of market capitalization. Most notably, Kellogg's return on equity is second-highest in the industry, and its 3.2% dividend yield is sixth highest. The company's Price/Earnings to Growth is also decent, falling in the upper third. However, the company is middle of the road in terms of long-term growth rate, earnings growth and sales growth. Kellogg's main competitors are General Mills Inc. (GIS) and Ralcorp Holdings (RAH) (oversees Post Cereals). Of the three, Kellogg has the highest Gross Margin, the second highest operating margin and the lowest sales growth.

Earnings Buzz: Before the opening bell today, Kellogg Co. reported lackluster operating results for the first quarter. Compared with the same quarter last year, net sales dipped 1.3% due to systemic challenges in European markets. The company is also struggling to drive volume growth in certain domestic categories. Profits remained unchanged at $1.00 per share; this slightly topped the consensus estimate of $0.99 per share. But, the big news from this morning was that Kellogg's management cut the company's full-year outlook. Kellogg now expects internal net sales to climb 2% to 3%; this is down from its initial projections of a 4% to 5% increase. In addition, the company predicts that its acquisition of the Pringles potato crisps brand will decrease earnings between $0.06 and $0.11 per share. This, above all else, spooked investors, so shares gapped down 5% this morning.

Current Ratings: Before you buy any stock, you should always run it through my free Portfolio Grader ratings system.  During the volatile summer months, Kellogg Co. was strong enough to warrant a B-rating. However, since November, this stock has remained firmly in hold territory. Right now, the company's fundamental metrics are lackluster at best; Kellogg is strong only in terms of return on equity, earnings growth and earnings momentum. The other five fundamental measures, including sales growth and cash flow, are all C-rated. In addition, buying pressure for this stock has been flagging for some time. K receives a C-rating for its Fundamental Grade as well as for its Quantitative Grade.

Bottom Line: This stock is a hold, so I recommend that you avoid this stock for now.

Sound Off: What do you think about K? Are you a buyer at current prices? Let me know what you think by posting on our wall on Facebook.

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