This post is part of our Big Company, Small Town series, featuring large companies and the small towns in which they are headquartered.
There are probably very few people growing up in North America that have not had Kellogg's (NYSE: K) cereal at some time. I know people that have breakfast cereal for lunch or diner as well. It is the number one U.S. breakfast cereal maker, ahead of General Mills (NYSE: GIS). Among its well-known brands are Frosted Flakes and Rice Krispies.
The company, founded by Keith (W.K.) Kellogg and brother, Dr. John Harvey Kellogg, began with only 44 employees in 1906. Today it employs more than 30,000 people, manufactures in 18 countries, and sells products in more than 180 countries.
Kellogg is a big company in a small town but it is not alone. Battle Creek, Michigan, known as the "Cereal City," is the world headquarters of Kellogg Company and also the home of Post Cereals, which was part of General Foods Corporation and is now part of Kraft Foods (NYSE: KFT). When Kellogg started, there were 42 other cereal companies in Battle Creek.
General Mills (NYSE: GIS), arch competitor of fellow cereal seller Kellogg (NYSE: K), posted some good news for shareholders on Monday. In an otherwise gloomy day that saw the Dow remain below the 12,000 level and inflationary pressures still exerting a hold over the market, General Mills proved that dividends are at least one island of safety in a sea of trouble.
The company indicated that it will now pay an annual dividend of $1.72 per share. Previously, the annual dividend was set at $1.57 per share. This is a nice example of double-digit appreciation of approximately 10%. Based on Monday's closing price, General Mills' stock now yields a hearty 2.7%.
As a long-term idea, General Mills is certainly one of the best. As I observed with Kellogg, you can put this one on perpetual dollar-cost-averaging. However, with the stock in 52-week-high territory, and with prices for commodities, especially corn, still exerting a negative effect on businesses, I'd be a bit cautious about entering just now. Is it possible one might get General Mills closer to a 3% yield? I can't predict the short-term future, but my gut says that a pullback is inevitable. Even with cool dividend increases, stocks can return to the low end of a 52-week range at any point. Just look at Coca-Cola (NYSE: KO) and the recent pressure its stock has been under. And Coke is a dividend stalwart. Nevertheless, I am bullish on General Mills' future. Just watch out for commodity trends, and perhaps remain patient for better prices on the shares.
Disclosure: I own Coke; positions can change at any time.
Like all processed food producers, Kellogg Company (NYSE: K) is facing rapidly climbing costs for corn, wheat and sugar, the basic building blocks for many of its products. Rather than passing those costs on to consumers in a straightforward manner by raising prices, Kellogg is taking a sneakier route: making some of its cereal boxes smaller while keeping the price the same.
Starting this month, Kellogg will shrink the size of boxes of Apple Jacks, Cocoa Krispies, Corn Pops, Froot Loops and Honey Smacks by an average of 2.4 ounces.
Of course, using this approach is in the end the same as simply raising prices. The key is price per ounce, which goes up whether you reduce quantity or increase price. So although you will pay the same price for a box of these sweet cereals, the per ounce cost of a corn syrup high in the morning will go up.
Even though reducing ounces per box amounts to a price increase, smaller boxes have a different psychological effect than adding a few pennies to the retail price. Food companies use this approach in the hope that most consumers won't notice, and research suggests that this is in fact true.
I suppose this means that most shoppers don't look at the per ounce cost when buying things like cereal. When it comes to inflation, maybe ignorance really is bliss.
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Talk about a tough time in the markets. Between the financial crisis and oil prices rising on an almost daily basis, with the Fed damned if it raises rates and damned if it doesn't, the floods in the Midwest are now threatening to make a trip to the supermarket much more expensive. Yes, break out the coupons and pray for sales, because, according to The Wall Street Journal [subscription], food prices are destined for one direction: higher. That's because a lot of farmland has been damaged, throwing the supply-demand dynamic into chaos.
What does this mean for investors? Look for potential pressure on the stocks of companies such as Coca-Cola (NYSE: KO), PepsiCo (NYSE: PEP), Kraft (NYSE: KFT), Kellogg (NYSE: K), General Mills (NYSE: GIS), and Hershey (NYSE: HSY). I happen to own Coke, and I've heard the news reports talking about how higher corn prices will affect Coke and Pepsi because they use corn syrup as an ingredient for their sodas. It's also been pointed out by others that PepsiCo owns Frito-Lay, and since that company manufacturers salty snacks such as Doritos and Tostitos (I love them both), corn prices will also have an impact on that division.
If you're a trader, be wary. We might be in for a rough ride this summer with not only the stocks I've mentioned here, but in a general sense. Since I own Coke, I've been acutely aware of the pullback experienced in that stock as the external pressures surround it. As I write this, the stock is trading at $54.27. The shares were over $65 during their wonderful stay at the 52-week-high suite. So, yes, buyers with short-term mentalities must be wary. However, long-term investors should look upon any pullbacks as potential opportunities for some of these food-selling companies. If you don't intend to trade, then adding to a Coke or Pepsi position might make sense.
Disclosure: I own Coke; positions can change at any time.
MOST NOTEWORTHY: Omnicare, Coca-Cola and OptionXpress were today's noteworthy upgrades:
Oppenheimer upgraded Omnicare (NYSE: OCR) to Outperform from Perform citing their analysis that indicates the Rx market is stronger than expected in the LTC channel, which is largely overlooked by investors due to the legacy focus on beds. The firm expects solid Q2 results will increase confidence in the company's ability to achieve mid-point or better EPS guidance.
Deutsche upgraded Coca-Cola (NYSE: KO) to Buy from Hold based on favorable currency impact, international growth, and valuation.
OptionXpress (NASDAQ: OXPS) was raised at Merriman to Neutral from Sell as they see little downside to risk estimates, following several rounds of cuts, and valuation.
OTHER UPGRADES:
Fresh Del Monte (NYSE: FDP) was upgraded to Outperform from Market Perform at Wachovia.
JP Morgan upgraded Kellogg (NYSE: K) to Overweight from Neutral.
Oppenheimer downgraded shares of Chelsea Therapeutics (NASDAQ:CHTP) to Perform from Outperform after their survey suggested physicians believe currently available generic treatments are adequate in neurogenic orthostatic hypotension, which could impact the company's lead drug Droxidopa.
Clearwire (NASDAQ:CLWR) was cut to Sell from Hold at Citigroup on valuation, as they estimate fair value at $13.
OTHER DOWNGRADES:
Goldman downgraded Kellogg (NYSE:K) to Neutral from Buy and Hershey Foods (NYSE:HSY) to Sell from Neutral.
Cereal maker Kellogg (NYSE: K) issued its Q1 earnings today, and while it may not have been the most exciting event on Earth, it did beat expectations, according to Briefing.com.
The strong dollar benefited the top line, as net sales increased 10% (stripping out the effect of the strong dollar yields a top-line growth rate closer to 5%). Operating profit advanced 9%. Unfortunately, not much was happening on the bottom line -- earnings per diluted share only gained a penny, coming in at $0.81 (there was a better tax situation in last year's similar quarter, however). Not much took place in the area of cash flow either -- free cash flow declined to $181 million; last year at this time, the breakfast guru reported $289 million in free cash.
Still, Kellogg's management seems pretty confident in the company's future prospects as it saw fit to bestow a 10% dividend increase on shareholders. And going back to the expectations game, earnings came in $0.05 more than expected -- that's excellent. Kellogg, like General Mills (NYSE: GIS) and Kraft (NYSE: KFT), is a great idea for long-term dollar-cost-averaging and dividend-reinvesting (love those hyphenates!). Just don't expect tech-like growth, and do expect bumps along the way, especially with commodity prices acting as they have been.
Disclosure: I own none of the companies mentioned here; positions can change at any time.
Kraft Foods, Inc. (NYSE: KFT) is in a bit of a pickle. As the following article makes clear, the company knows it has to raise prices. There's just no choice in the matter. Commodity input costs are on the rise, and something has to give. But the problem is, consumers not only have to pay more for Kraft foodstuffs, they have to ante up more of the green stuff for everything else too -- fuel for the car, heating oil for the home, you know the drill.
If you're a Kraft shareholder, should this concern you? What about if you own other consumer-oriented stocks based on the supermarket shelves that are feeling the inflationary pinch, companies such as General Mills, Inc. (NYSE: GIS) -- which reported earnings today -- or Kellogg Company (NYSE: K), or maybe even beverage businesses like The Coca-Cola Company (NYSE: KO) or PepsiCo, Inc. (NYSE: PEP)? Well, it should, of course. Inflation is no fun, and with the price of oil hitting new highs recently, a trend that seems very much intact, consumers will be strapped. In fact, Kraft is now trying to make up for lower volumes by raising the cost of its goods; this isn't ideal, perhaps, but Rick Searer, who is the president of Kraft North America, brings up an almost humorous point -- "consumers have to eat." I have yet to meet one that doesn't, come to think of it!
But I think the consumer companies are relatively sophisticated with their data-analysis protocols and are, perhaps, a bit more nimble in terms of deducing what shoppers want to buy for purposes of stocking their pantries. At least, I would hope they are -- we've been hearing about better data-mining techniques for years. Kraft obviously will promote a wait-and-see attitude in terms of the consumer and her reaction to the recession, but I don't think shareholders should be overly worried at this point. A lot of these defensive names have international exposure and stand to benefit from the falling dollar, for one thing. For another, we all have to eat! And since the defensive names generally have dividend yields, they tend to be safer bets during a recession; don't think they can't fall, though, because they can. One just hopes they don't fall as much as, say, your typical financial entity or a broad market index.
Disclosure: I own shares of Coca-Cola; positions can change at any time.
Everyone loves ketchup (well, then again, I'm sure there are a few out there who don't). But should everyone love Heinz's (NYSE: HNZ) latest earnings missive?
I say the earnings were respectable, if not utterly spectacular, in the third quarter. The top line moved up a robust 14% to $2.6 billion in sales; operating income increased 8%. The bottom line, however, was, eh, okay -- $0.68 per diluted share for this Q3 versus $0.66 per diluted share for last year's Q3. A two-penny increase isn't a reason to party, I suppose. Then again, Heinz isn't one of those companies that inspire you to throw a party upon an earnings release. Like Hershey (NYSE: HSY), Campbell Soup (NYSE: CPB), General Mills (NYSE: GIS), Kellogg (NYSE: K), and Kraft (NYSE: KFT), it's a consumer foodstuffs name backed by a portfolio of well-known brands that people gravitate toward every day in supermarkets across the globe.
Here's the thing about Heinz, however: it sports a yield of approximately 3.3%, and it is in the middle of a tight 52-week range. That is definitely an attractive situation for the stock. Heinz is being perceived as a safe, recession-proof play. I'm not sure anything is truly recession-proof, but I do think the yield is impressive, and I think that such a stock may continue to hold steady, and even outperform, in this environment.
I'm not a fan of soup; never had the stuff in my life. But I notice that Wall Street is liking Campbell Soup's (NYSE: CPB) stock today; at the time of this writing, the shares are up a little over 6%. Guess there's money to be made in that soup stuff, no matter what I may think.
For the second quarter, Campbell saw a 7% rise in net sales. Earnings from continuing operations were $0.67 per diluted share for the quarter compared to $0.65 per diluted share for the year-ago period. Gee, that doesn't sound like such hot growth. But as some articles have observed, Campbell's stock has been sold off in recent months, so this is sort of a buy-on-the-news scenario. Plus, total soup sales increased 4% in Q2, and the baking/snacking segment increased its top line by 8% -- those iconic Goldfish crackers will not be stopped, let me tell you. And you know what else is doing well? Those V8 V-Fusion beverages. I've been drinking a ton of that stuff lately; those drinks really are superb. Gross margin was down, though. I don't like that, but I do enjoy the fact that operational cash flow increased for the first half of the year: that metric came in at $442 million...in the previous comparable period, Campbell booked $328 million. Campbell recently decided to dump its Godiva brand.
I didn't find this earnings report so exciting, but Campbell Soup is like Kraft (NYSE: KFT), Kellogg (NYSE: K), General Mills (NYSE: GIS), and Hershey (NYSE: HSY) -- it has a valuable portfolio of foodstuffs that people buy every day, and it pays a dividend that should go up over time. It's not my favorite dividend-reinvesting name right now, but it'll be around for the long term. And even though I am not helping out investors by shunning soup, I do have to reiterate my love for those V8 Fusion drinks -- believe me, I'm aiding the company significantly on that front.
TheStreet.com's Jim Cramer says balance sheets are strong, so spillover isn't an issue.
I get emails and postings almost every day from fixed-income specialists, saying that the credit markets' myriad problems simply aren't being reflected in the equity markets, and that's just plain wrong. They warn us equity players that we are dreamers and that it is just a matter of time before the terrible problems in collateralized debt, huge leverage, and now auction rate preferred notes spill over into equities and that any rally in stocks is just a fool's paradise.
There's a problem with this inevitability story though, one that eludes these critics and might continue to elude them -- it hasn't happened yet, despite a year's worth of turmoil. That's a long time for a big problem like this to be cordoned, so it is worth looking at whether the naysayers are wrong and something else is at work.
When I look around at the vast choices of assets out there for the thousands of fund managers and institutions that have to put their money somewhere -- provided it is not dedicated to a particular asset from the get-go -- I see one world in chaos and another world in order. The bond market, the credit market, is in total disarray, with every aspect of its existence save Treasuries under fire. We know now that a simple reset market for municipals is failing because, of course, the charade of the bond insurers and their chimerical protection. The CDO market stinks. This is a multibillion dollar market where no one can figure out the prices of anything and the spreads between the bid and the ask are so wide that no one can afford to own or trade them. You don't know where they are marked. You don't know what's in them. You don't know what they are really rated. They are basically worth nothing right now to anyone. Commercial paper? Hardly worth the pick-up in interest. "Cash reserves"? We have seen the "buck" supported over and over again. There has to be a moment where the buck is broken.
First oil. Then copper, then lumber, and coal. And now grain.
The solid economic growth in the world's emerging markets that's caused oil / coal and commodities prices to surge is now fully hitting the grain market.
So much so, that some food producers are calling on the U.S. government to restrict exports due to soaring prices for grains they use to make cereal and other foods. Meanwhile, some farmers are asking the U.S. Government to ease restrictions to enable farmers to plant more acres, The Wall Street Journal reported Thursday [Subscription required].
For food producers, the issue involves limiting a major operating cost. During the past year, spring wheat has risen to an astounding $17.63 per bushel, up from about $4.90 a year ago. Flour, which used to cost about $15 per 100 pounds, now sells for about $45-48 per 100 pounds. Food producers say prices are increasing so fast, they can't pass along price increases quick enough to keep up.
Merck & Co. (NYSE: MRK) shares are gaining 1% in premarket trading after it posted a $1.6 billion loss in the fourth quarter due to large charges for its Vioxx litigation settlement and other items dragged down results. While Net loss amounted to 75 cents per share, fourth-quarter charges totaled $3.4 billion, or $1.55 per share. Excluding the one-time earnings, net income would have been 80 cents per share, beating the expected 74 cents earnings per share. Revenues were up 3% to $6.24 billion, slightly less than the estimated $6.3 billion. Merck also lowered its full-year 2008 forecast.
Boeing Co. (NYSE: BA) reported a fourth-quarter profit rise of 4% $1.03 billion, or $1.36 per share on higher commercial airplane deliveries and strong growth in defense earnings, beating Wall Street's expectations of $1.32 per share despite ongoing concerns over delays in its 787 Dreamliner program. Boeing also increased its guidance for 2008 earnings, citing productivity improvements.
Also reporting today: Kraft Foods (NASDAQ: KFT) is expected to post earnings of 44 cents a share in the fourth quarter. United Parcel Service Inc. (NYSE: UPS) is expected to report fourth-quarter earnings of $1.13 a share. Eastman Kodak Co. (NYSE: EK) is expected to report earnings of 52 cents a share in the fourth quarter. Kellogg Co. (NYSE: K) is expected to post earnings of 44 cents a share in the fourth quarter.
This post is part of our Big Company, Small Town series, featuring large companies and the small towns in which they are headquartered.
General Mills
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Talk about a tough time in the markets. Between the financial crisis and oil prices rising on an almost daily basis, with the Fed damned if it raises rates and damned if it doesn't, the floods in the Midwest are now threatening to make a trip to the supermarket much more expensive. Yes, break out the coupons and pray for sales, because, according to .gif){kind=logo}
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Here are some highlights from this past week's 
Cereal maker 
First oil. Then copper, then lumber, and coal. And now grain. 
Comfort Zone Investing: Keep your recovery expectations real
Will Americans have to slim down to fit into their cars?
Starbucks: The next McDonald's
