Kellogg Shares: They're Grrrrrrrrounded!

In addition to the questions, comments, and concerns section found on each and every box of Kellogg's (NYS: K) cereal boxes, you may soon be seeing a box that reads, "Does anyone else have a good idea?"

OK, so that was an exaggeration, but things are so bad with this breakfast giant at the moment that it actually may not be a bad idea. Frosted Flakes may taste fantastic (there's a shameless plug for you, Kellogg), but its stock is completely grounded to the point that not even Tony the Tiger is going to be able to claw his way out of this mess.

Before the bell yesterday morning, Kellogg snapped, crackled, and popped downward after the company lowered its full-year EPS forecast to a range of $3.18 to $3.30 versus Wall Street's expectation of $3.48. This news comes just two months after Kellogg predicted a 2% to 4% increase in operating profit in 2012. The company now expects that profits will be down 2% to 4% this year.

Kellogg is contending with numerous problems that simply aren't going to go away overnight.

For starters, rising input prices are crushing the margins of all food producers at the moment. Sugar prices are down, which is providing temporary relief, but other aspects of Kellogg's business, including wheat and corn, remain at elevated levels from where they had been years ago. Kellogg isn't alone here, with both Ralcorp (NYS: RAH) and General Mills (NYS: GIS) struggling to pass along rising input prices to consumers.

A lack of product diversity is also working against Kellogg. Whereas a food-products company like Kraft (NYS: KFT) boasts a product line that includes snacks, beverages, and full meals, Kellogg's product line is very skewed toward breakfast, which leaves it limited growth potential. Kellogg is attempting to remedy that problem by purchasing the Pringles brand from Procter & Gamble (NYS: PG) for $2.7 billion, but questions still exist whether this move will completely solve its product-diversity dilemma.

In addition to not having a good mix of product, Kellogg's regional diversity isn't very exciting, either. Based predominantly in the United States and Europe, Kellogg's markets are largely saturated, leaving it few avenues of growth aside from raising its prices. Again, the Pringles brand, which is distributed in 140 countries, may be able to solve some of its problems, but Kellogg definitely needs to aim for a larger international breadth.

The one thing Kellogg does have going for it is cash-flow stability. Though its operations are stagnant, it continues to deliver profits to the bottom line with its easily recognizable brand name. This relatively predictable cash flow allowed the company to announce a 2.3% dividend increase beginning in the third quarter, marking its eighth straight year of quarterly dividend increases.

The question now is whether a healthy dividend makes up for poor product diversity and stagnant growth. I'm not inclined to think it does, and I think Kellogg's stock could actually fall further.

Do you have any advice for Kellogg's management? Share it in the comments section below.

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At the time thisarticle was published Fool contributorSean Williamshas no material interest in any companies mentioned in this article. Frosted Flakes really happens to be his favorite cereal. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.Motley Fool newsletter serviceshave recommended buying shares of Procter & Gamble. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policythat's always a balance meal of truth.

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