Global Growth Problems?

11/11/2013 12:01 am EST


Jim Jubak

Founder and Editor,

The recent revenue numbers, and more importantly, the guidance from Kellogg, may have implications for the global economy, says MoneyShow's Jim Jubak.

Okay, Kellogg reported its third quarter earnings on November 4, and, while the earnings themselves were pretty good, in the sense that they beat Wall Street estimates by about six cents a share, revenue was really pretty terrible, it was down 1% year over year, and the company said some really, very negative things about growth going forward. The important thing I think here is that a) yes, Kellogg as a specific company has growth problems, the food sector, the cereal sector, as a specific sector, has growth problems, but it looks like we're also starting to talk about global growth problems that really transcend these problems.

Kellogg's problem, as an individual company, is that, well, it gets about 64% or so of its revenue from the United States, it really doesn't have much of a presence in the faster growing emerging markets and that has really held it back. In terms of a sector, well, Kellogg is fighting against trends in the breakfast market toward more protein-rich things like Greek yogurt, and cereal consumption is not growing very fast. Globally, the problem is that global growth indeed seems to be down.

What Kellogg said was that it's not looking, it cut guidance for the rest of 2013 into 2014, and it basically said, "Hey, you know, we're not seeing growth, in fact we're going to have to get involved in deeper, deeper cost cutting," the company said that it would cut about 7% of its workforce by 2018. It put in place a cost cutting program called Project K, not to be confused with Special K, but again there's a four-year time horizon.

All this designed to get the company back to a position where it's generating enough cash they can reinvest in markets and products that it can grow. What was interesting is that if you put what Kellogg together with something like one of its peers like Kraft Foods said, it's clear that we're not talking just about a specific company or even necessarily a specific sector.

What Kraft Foods said at its conference call was hey you know we're not seeing global growth, what we're seeing is the global consumer is really, really stretched. People are not buying more than they need maybe for the next day or week, and we don't see, Kraft said, "a way to sort of promote our self out of this, we need more global growth, we can't simply market more efficiently; we can cut costs but the growth simply isn't there."

If you're looking at that and saying "Oh, stocks are at an all-time high in the US, growth is really not coming through," then Kellogg is a good example of the problem, and not one that's specific to itself. One of the problems here is that if you look at Kellogg, these are numbers from Credit Swiss, the food group, that's Kellogg, Kraft, Campbell's Soup, over the long-term trades at about a 20% discount to the general beverage and personal healthcare sector. Right now that's the 20-year average; 10-year average is down, about a 10% discount. Right now the discount for Kellogg and the food group is only about 7%, so despite these growth problems, you could then say, historically these stocks are still pricy, it's a bad combination, lower growth as well as higher than usual premium. It suggests that there are troubles here in the global economy that are really being papered over, if you will, by a flood of paper money from the world central banks.

This is Jim Jubak for the video network.

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