Will Kellogg Stock Move Higher?

With shares of Kellogg (NYSE:K) trading around $63, is K an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Kellogg is engaged in the manufacture and marketing of ready-to-eat cereal and convenience foods. Kellogg’s principal products are cereals, cookies, crackers, toaster pastries, cereal bars, fruit-flavored snacks, frozen waffles, and veggie foods.  It also markets under other brands such as: Keebler, Cheez-It, Murray, Austin, and Famous Amos to supermarkets in the United States. The company’s cereal products are generally marketed under the Kellogg’s name and are sold principally through direct sales forces for resale to consumers. As of this year, their products were manufactured in 17 countries and marketed in more than 180 countries. Convenience food continues to see increased demand so a company like Kellogg that can provide these products at affordable prices across the globe stands to make significant profits.

Kellogg announced third quarter 2013 reported net sales of $3.7 billion. Reported net sales were $3.7 billion in the third quarter of 2o12. “We are excited by the potential and opportunities we see for growth in the categories in which we operate,” said John Bryant, Kellogg Company’s president and chief executive officer. “As a result, we are making the difficult decisions necessary to address structural cost-saving opportunities which will enable us to increase investment in our core markets and in opportunities for future growth. These actions will set a foundation for our Sustainable Growth operating principle.”

T = Technicals on the Stock Chart Are Strong

Kellogg stock has seen an explosive run in the last several yeras. The stock is currently trading slightly below highs for the year. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Kellogg is trading above its rising key averages, which signal neutral to bullish price action in the near-term.

K

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Kellogg options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Kellogg Options

15.94%

10%

8%

What does this mean? This means that investors or traders are buying a very small amount of call and put options contracts as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

December Options

Flat

Average

January Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very small amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Kellogg’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Kellogg look like and more importantly, how did the markets like these numbers?

2013 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

1.12%

6.67%

-13.27%

102.78%

Revenue Growth (Y-O-Y)

-0.11%

6.91%

12.24%

18.18%

Earnings Reaction

1.91%*

-1.23%

-1.84%

0.68%

Kellogg has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have had mixed feelings about Kellogg’s recent earnings announcements.

* As of this writing

P = Weak Relative Performance Versus Peers and Sector

How has Kellogg stock done relative to its peers, General Mills (NYSE:GIS), Post (NYSE:POST), Mondelez (NASDAQ:MDLZ), and sector?

Kellogg

General Mills

Post

Mondelez

Sector

Year-to-Date Return

13.46%

24.79%

24.06%

31.93%

24.56%

Kellogg has been a poor relative performer, year-to-date.

Conclusion

Kellogg provides essential food products that consumers enjoy all around the world. The company recently announced its third quarter earnings that left investors excited. The stock has been on an explosive move to higher prices in recent months and is now trading near highs for the year. Over the last four quarters, earnings and revenue figures have been rising, however, investors have had mixed feelings about the company. Relative to its peers and sector, Kellogg has been a poor year-to-date performer. Look for Kellogg to catch-up and OUTPERFORM.

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