Streetwise for May 23,  2010

Streetwise

Lauren Rudd

Sunday, May 23, 2010

Why Do You Make This Investing Thing So Difficult?

Why do so many of you want to make this investing thing so difficult? Forget about daily stock trading, or buying mutual funds. Forget about receiving “help” from your friendly stock broker, or tips from Uncle Joe.

Instead, opt for investment candidates selected from a universe of companies whose products you know and understand, companies that have both with a track record of positive earnings growth and a future that is aligned with the economy. In doing so, you are likely to outperform the vast majority of mutual funds and indexes during any 1-to-3 year period. That statement is based on about four decades of Wall Street experience.

Understand that the emphasis is on you and what you believe and identify with, not what someone else says. However, also understand that in today’s environment you simply cannot invest and then forget. Keep an eye on your investments; make sure the companies are doing what they said they would do.

So by now you are probably thinking that I should provide you with an example of a potential investment. Great idea and I cannot think of a better example than Kellogg, the company I still associate with the characters Snap, Crackle and Pop.

To start, Kellogg has achieved a distinguished level of honesty and ethical behavior, a real treat these days. In fact, Kellogg has been called out in the past as being one of the country’s most ethical corporations.

Furthermore, food is an excellent example of a sector with virtually complete inelasticity. In general that means there is no substitute product should food prices rise. You still have to eat. And, while you may cut back on the quantity purchased, or switch to a lower priced but comparable item, if you have been an on-going consumer of Kellogg’s products then it is highly probable that you will continue in that vein despite price increases.

All of which is a long winded way of saying that although Kellogg is not immune to the volatility of today’s markets, it is well positioned to ride out most any economic storm, while still delivering positive results to shareholders. When I last discussed the Company a year ago, my earnings estimate for 2009 was $3.12 per share and $3.40 per share 2010. My 12 month price target back then was $49 per share. So how well did the Company perform?

Earnings for 2009 came in at $3.16 per share, exceeding my estimate by 4 cents. The shares recently closed at $55.58, well above my target price. So the only question now is what can we forecast in terms of future performance? For an indication let’s look at the Company’s recently reported first quarter.

Net earnings came in at $418 million, or $1.09 per share, a 30 percent increase over the same period a year ago. Net sales increased 5 percent to $3.3 billion. Internal net sales growth, which excludes the effects of foreign currency translation, rose 2 percent. Operating profit grew 20 percent to $637 million, while the Company’s gross margin increased 1.9 percent to 43 percent for the quarter.

Kellogg's interest expense for the quarter totaled $65 million, an improvement over last year. Discrete tax benefits lowered the first quarter effective tax rate to 27.2 percent. Cash flow, defined as cash from operating activities less capital expenditures, was $190 million for the quarter.

The Company reaffirmed its 2010 guidance that earnings per share are expected to increase by 11 to 13 percent. At the same time, the Company’s Board authorized a $2.5 billion stock repurchase program, reinforcing its commitment of returning cash to shareholders.