WRAPUP 2-Kellogg, Hershey views highlight food sector woes

* Hershey gives disappointing 2011 forecast

* Kellogg cuts 2010 view for 2nd time on weak cereal sales

* Hershey shares down 3 pct; Kellogg nearly flat
(Rewrites; Adds analysts’ comments; Changes headline)

By Martinne Geller

NEW YORK, Oct 21 (BestGrowthStock) – The specter of rising
commodity costs scared investors away from U.S. candy maker
Hershey Co (HSY.N: ) while Kellogg Co (K.N: ), reduced its profit
forecast, hurt by price competition.

But the Kellogg forecast quantified concerns already in the
market and its shares were nearly flat.

Hershey, the maker of Hershey’s Kisses and Reese’s peanut
butter cups, saw its shares fall 3 percent on Thursday after it
gave a range for expected 2011 earnings with a mid-point that
was below analysts’ average estimate. It also said ingredient
costs would be higher next year — a big concern for U.S. food
makers at a time when a sluggish economy makes it hard to raise
prices. [ID:nN0492040]

Consumers’ habit of buying whatever brand is on sale has
fueled an intense price war at grocery stores across the United
States and hurt profits at many food companies, including
Kellogg, the world’s biggest cereal maker.

The maker of Frosted Flakes cereal and Eggo waffles cut its
2010 outlook for the second time, citing weak cereal sales that
were hurt by price competition and a product recall. But the
company’s shares were off only slightly, on relief that the
impact was not worse.

“The issues that prompted the guidance cut today were
already pretty well understood by investors,” said Edward Jones
analyst Matt Arnold. “We now have a decent feel for what the
risk is, and it certainly could have been worse.”

Kellogg said it now expects earnings to rise 4 percent to 5
percent for 2010, excluding the impact of foreign currency (Read more about trading foreign currency.
fluctuations. That is down from the 8 to 10 percent forecast it
gave in July, which itself was lower than its previous view.

It is expected to report third-quarter earnings on Nov. 2.
[ID:nN21273800]

“Kellogg was negatively impacted from their own recall,”
said Morningstar analyst Erin Swanson, referring to when the
world’s largest cereal maker voluntarily pulled millions of
cereal boxes from store shelves across the country in June due
to some foul smells. [ID:nN25162877].

By contrast, rival General Mills Inc (GIS.N: ) said last
month that sales rose 1.5 percent, helped by a 4 percent gain
for cereal. [ID:nN2299767]

Arnold said General Mills was “the star of the group” when
it comes to managing costs in a tough environment and being
able to boost revenue with product innovations such as
chocolate Cheerios and Pillsbury mini pancakes.

Standard & Poor’s Equity Research lowered its rating on
Kellogg to “Hold” from “Buy,” and cut its 12-month price target
to $53 from $55.

Kellogg shares were off 2 cents at $50 in afternoon trade
on the New York Stock Exchange on Thursday.

COSTS, EXPECTATIONS WEIGH ON HERSHEY

Hershey, meanwhile, reported third quarter earnings that
were in line with expectations and raised its 2010 forecast. It
also said sales for Halloween — a key season for candy makers
— were off to a good start. [ID:nN21244455]

Hershey also forecast 2011 earnings of $2.67 to $2.76 a
share, excluding one-time items. Analysts on average forecast
$2.74 per share, according to Thomson Reuters I/B/E/S.

Its shares fell $1.58 to $49.52 in afternoon trading on the
New York Stock Exchange.

“There is no doubt that inflation is a headwind next year
compared to this year,” said a Hershey executive on a
conference call, noting that Hershey’s key ingredients include
cocoa and dairy. “We have it built into how we think about the
top line and bottom line.”

Hershey’s forecast could prove to be conservative, said
Barclays Capital analyst Andrew Lazar, but in the meantime, he
noted it could be “a bit disappointing to investors that have
become accustomed to double-digit gains the past two years”.

“Given the stock’s 30 percent premium to the packaged food
(industry), we could see the shares giving up a bit of ground
today,” Lazar wrote in an analyst note.

Hershey said it now expects 2010 profit of $2.52 to $2.56
per share excluding items, up from a prior range of $2.47 to
$2.52 per share and analysts’ estimate of $2.53 per share.

Net sales rose 4.2 percent to $1.55 billion, driven by
increased sales volume of its core U.S. brands and growth in
its emerging market businesses. But the sales fell short of
analysts’ expectation for sales of $1.56 billion.
(Writing by Brad Dorfman)
(Reporting by Martinne Geller, editing by Dave Zimmerman)

WRAPUP 2-Kellogg, Hershey views highlight food sector woes