Kellogg Cites Strong Demand in Higher Profit

CHICAGO – Kellogg Co. (K), the world's largest maker of breakfast cereal, on Tuesday reported a 3 percent rise in quarterly profit and nudged up its 2006 earnings forecast as increased market share helped offset higher fuel and employee benefit costs.

But the company's shares slipped 2 percent following the announcement on investor concerns that first-quarter results may be down from a year ago, one analyst said.

"They've had such monster first quarters for the last couple of years, so that has created a difficult comparison," said D.A. Davidson analyst Tim Ramey.

The maker of Frosted Flakes cereal and Keebler cookies said fourth-quarter net income increased to $192.4 million, or 47 cents per share, from $186.4 million, or 45 cents per share, a year earlier.

Analysts on average had been expecting earnings of 46 cents a share, according to Reuters Estimates. Excluding the impact of a lower-than-expected tax rate, however, results were slightly below Wall Street estimates, analysts said.

Quarterly revenue was unchanged at $2.4 billion. Cereal sales rose 8 percent in the key North American market, helped by sales of new varieties of Frosted Mini-Wheats and Special K. Year-earlier results benefited from an extra selling week, making comparisons particularly tough.

In the last year, Kellogg has succeeded in taking cereal market share from General Mills Inc. (GIS) by keeping its prices lower than those of its smaller rival. In recent months, however, General Mills has reversed some of those losses by adjusting prices and boosting marketing.

However, Ramey said General Mills' market share gains are not necessarily "coming out of Kellogg's hide."

In an interview, Kellogg President and Chief Operating Officer David Mackay said increased consumer interest in health and wellness was helping to drive cereal sales industrywide.

Ramey, who has a "neutral" rating on Kellogg shares and does not own them, said the company is "a bastion of stability and predictability" compared with rivals like Kraft Foods Inc. (KFT), which announced on Monday it would cut up to 8 percent of its work force to try to offset higher commodity costs.

Chief Executive Jim Jenness said on a conference call with analysts that Kellogg has been able to keep higher input costs in check thanks to its consistent focus on efficiency.

"We would much prefer to be going at this on a continual, smooth basis ... versus having it where all of a sudden the rubber band breaks and you have to do a major restructuring," Jenness said.

The company said past cost-cutting initiatives would help increase gross profit margins in 2006 despite expectations for significantly higher fuel, energy and employee benefit costs.

At the same time, however, Kellogg Chief Financial Officer Jeff Boromisa declined to tell analysts whether the company would post higher earnings in the first quarter, when it faces tough comparisons against strong year-ago results.

Kellogg said it would increase spending on marketing and advertising faster than it expected sales to grow this year. It also plans to cut about $90 million in costs.

Battle Creek, Michigan-based Kellogg raised its 2006 profit forecast to a range of $2.43 to $2.48 per share, including estimated costs of 9 cents for expensing stock options.

In October, Kellogg had forecast $2.42 to $2.47 per share, including 8 cents for the cost of stock-based compensation.

The company's shares were down 92 cents, or 2.1 percent, at $42.76. The stock trades at roughly 17.3 times analysts' average 2007 earnings estimate, compared with a multiple of about 15.4 for Kraft and 15.5 for General Mills.