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What You Need To Know About Kellogg Stock

Kellogg hold not one, but several of the most influential breakfast brands across the world today. Yet the company is on the precipice of a divide. By the end of this year, Kellogg will have cut itself in half. On one side, we’ll have W.K. Kellogg Co. They will control the classics; Raisin Bran, Special K, Cornflakes, Froot Loops, and Rice Krispies. For those who are already investors in Kellogg stock, this is exactly where your money is going.

Kellanova is the other half of the story. Here, brands such as Pop Tarts, Pringles, Cheez-Its, Crunchy Nut, and Stranger Things favourite Eggo’s, will be placed. These are considered the ‘growth’ elements of the Kellogg portfolio.

The reason for the divide is simple. Kellogg feel that each half of the company deserves its own management team and structure. That way, the snack-heavy element can focus only on growth; and the classic breakfasts can focus on what they do best. Selling cereal.

Many investors have welcomed the news of the split. But the question is… does it present a buying opportunity?

Let’s start with three reasons Kellogg might be a great investment for 2024.

Bull Case 1: The Ferrari Of Breakfast

Kellogg have brand power that we at Footnote feel is undervalued by the majority of investment analysts covering the stock today. We think Kellogg is the Ferrari of breakfast cereals. The company occupy a unique space as a premium breakfast provider, at least in terms of cereal, the world over. This advantage acts as a powerful moat that very few companies could ever dream to cross.

Some strongly disagree with this. In their mind, store-brand cornflakes are the same as Kellogg’s cornflakes. Granted, there are cheap substitutes widely available. This means barriers to entry may not be as tall as we at Footnote believe.  

Yet cheap alternatives are ultimately a testament to the brand’s power. If a product is strong enough to merit knockoffs, they’re not leaving stores any time soon.

Bull Case 2 for Kellog Stock: Financials

Kellogg have the financials you’d probably expect. Nothing to brag about, but consistent. And that’s the beauty of Kellogg. They aren’t going to be the next Apple, Microsoft, or Amazon. Their stock isn’t going to rise by 5000% over a 10-year period, and they aren’t going to make headlines as the next big players in AI.

Kellogg is far more stable than that. And having stocks which steady our portfolios is something to be welcomed. Looking at K’s financials over the past decade, the company have turned a profit every single year. There hasn’t been as much growth as I’d like to see, I must admit, but acquisitions have been made and dividends paid.

Given the company reshuffle, it’s difficult to predict what’s next for Kellogg’s bottom line. At least in the short term. Some quarters will inevitably beat expectations, and some will disappoint. The long-term, though, we think is much easier to predict. Because in fifty years from now, when your grandkids are sitting down having breakfast with the family, we think we know which brand of cereal they’ll have placed on the table.

Bull Case 3: Valuation

Limited growth has had a serious impact on Kellogg shares. If you’d invested $1000 5 years ago, your shares would only be worth $800 today. Even over a ten-year period, you’d be looking down the barrel of a -2% return.

Given their financials, we feel this slump is perhaps understandable. Yet there’s reason to suspect that the following ten years won’t be so dismal. If nothing else, a cheap valuation give Kellogg the best possible chance at performing better.  

Using a Discounted Free Cash Flow model, we get a fair value for K shares to be worth in the region of $75. Right now, the stock is trading at $59. This 20%+ upside is nothing to be sniffed at, especially from a company so well established, that can be counted on to sell revenue.

Kellogg’s forward P/E is also attractive, at 15x. It should be noted here that, after the split, W.K. Kellogg are predicted to grow earnings between 12-15%, higher than the industry average of 10.4%. One more reason we think K is worth a look in now, before the two sides part ways.

Risks

Sadly, no amount of froot loops can cover the risks of Kellogg stock. Chiefly among them is Kellogg’s debt. We at Footnote feel management’s decision to hold their debt-to-equity ratio at 162% is, frankly, absurd. Their mission has been to raise dividends, which in turn has kept shareholders happy. But this is only a temporary fix. And besides, with only a 4.04% dividend yield, investors don’t have too much to be smiling about. We would therefore like to see that debt shrink dramatically, to sub 75% D/E, before we would consider making an investment.

Final Thoughts On Kellogg Stock

On the eve of the Kellogg split, we have reflected upon how we feel about the company. All-in-all, we at Footnote do love Kellogg. Their brand power alone is enough to ensure longevity. K’s financials are nothing to write home about, but there is consistency there. More important is their favourable valuation.

Yet they are by no means the perfect stock. We are especially concerned with debt levels but hope to see management lower these in the coming few years. Perhaps then we will consider investing, though it may already be too late.

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