Kellogg's 2008 view lags Street

LOS ANGELES (Reuters) - Kellogg Co (K.N) reported a 9 percent rise in quarterly profit on Monday but forecast 2008 earnings below Wall Street estimates due to higher commodity costs and expenses for reinvesting in its business.

Shares of the world's biggest maker of breakfast cereal fell 4 percent following the announcement.

Like many food companies, the maker of Frosted Flakes cereal, Eggo waffles and Keebler cookies has been hit by soaring prices on wheat and other ingredients, employee benefits and fuel. It also boosted spending on advertising.

The company also said its 2008 calendar will include a 53rd week, which is expected to add 5 cents a share to its earnings. That windfall is expected to be used to invest in its business or speed up growth in emerging markets, the company said.

Kellogg also said that next year it plans to spend about 14 cents a share in "upfront costs" to cut its long-term expenses.

Even with the benefit of the weaker dollar, which boosts the dollar value of sales in other currencies, the company still faces uncertainty in 2008, Morningstar analyst Gregg Warren said.

"They're going to get some benefit from international, but especially when wheat is your big cost, you don't want to say we're going to do stellar numbers next year and it's going to be fantastic, because you really don't know," Warren said.

Third-quarter net income was $305 million, or 76 cents per share, compared with $281 million, or 70 cents, a year ago. Analysts on average forecast 73 cents, said Reuters Estimates.

Sales rose 6 percent to $3 billion. But internal sales, which exclude foreign exchange and other factors, rose 4 percent.

North American sales rose 4 percent in the quarter and international sales rose 12 percent. Kellogg benefited from weakness in the U.S. dollar. Excluding foreign currency and other factors, international sales were up 5 percent.

Kellogg expects full-year earnings of $2.72 to $2.75 a share, up from its previous forecast of between $2.71 and $2.74 per share. Analysts on average forecast $2.78, according to Reuters Estimates.

Last month, top rival General Mills Inc. (GIS.N) said a recent move to reduce the size of its cereal boxes and charge consumers more per ounce led to an 8.2 percent rise in quarterly profit.

Kellogg's U.S. cereal shipments were flat in the quarter, which the company blamed on difficult comparisons against last year, when retailers built up more inventory than normal, rather than stiffer competition from General Mills.

"We continued to deliver strong consumption growth and we continue to gain share," Chief Financial Officer John Bryant said on a conference call with analysts.

Cost inflation is expected to be about 32 cents a share for 2007, up from a previous forecast of 26 cents to 30 cents a share, the company said. In 2008, however, higher energy, benefit and commodity costs are expected to total more than 40 cents a share, Kellogg said.

For 2008, the company forecast earnings of $2.92 to $2.97 a share. Analysts on average forecast $3.05 a share, according to Reuters Estimates.

"Low guidance has become common in recent years as investors have become accustomed to 10 percent EPS growth from Kellogg," UBS analyst David Palmer said in a research note. "While higher commodity costs and a stronger competitor in General Mills have been headwinds, international momentum and easy cereal comparisons should boost 2008 growth."

Also on Monday, Chief Executive David Mackay said the company expects to close several small acquisitions over the next few months. He declined to give specifics, but said that in total, the deals would cost between $200 million and $300 million and would be in several areas of the world.

Kellogg shares were down $2.30, or 4 percent, at $52.14 in morning trade on the New York Stock Exchange. At Friday's close, the stock trades at about 18 times analysts' average 2008 earnings estimate, compared with a multiple of about 16 for General Mills.

(Additional reporting by Brad Dorfman in Chicago)