Kellogg Is An Oasis Of Value In A Frothy Market

Kellogg Is An Oasis Of Value In A Frothy Market


Kellogg fits the description of being a “wonderful company at an attractive price”.

It’s seeing strong growth across its snack categories and this momentum should continue.

I also highlight the dividend, valuation, and other points worth considering.

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enot-poloskun/E+ via Getty Images Warren Buffett famously said that for a company to survive and thrive, their brand “had better deliver something special, or else it’s not going to get the business.” Perhaps he was referring to NIKE ( NKE ) or Microsoft ( MSFT ), or other select companies that have built strong brands over storied histories.

This brings me to Kellogg ( K ), which has moat-worthy brands and maybe one of those companies that Buffett was referring to. While Nike and Microsoft appear to be trading at nosebleed valuations, Kellogg’s stock appears to be in the opposite direction and sitting in value territory. In this article, I highlight what makes Kellogg a solid Buy at the present valuation, so let’s get started. A Wonderful Company At An Attractive Price

Kellogg is perhaps one of those companies that need little introduction, given the household nature of its products. This includes its signature Corn Flakes breakfast cereal, as well as consumer favorite snack brands such as Cheez-It, Pringles, Pop-Tarts, Eggo, and Rice Krispies Treats. The company was founded over a century ago with the introduction of Corn Flakes as its first product. Today, its products are available in nearly every country.

One of the reasons why one may want to invest in a company like Kellogg is the low volatility nature of its stock price. That’s because, unlike luxury items, people buy cereal and snacks in good times and bad. This is reflected by K stock’s beta score mostly hovering in the 0.6 to 0.9 range over the past 3 years. This makes the stock a good one to own in times of economic uncertainty. (Source: YCharts)

In addition, Kellogg’s strong brands drive pricing power. This is reflected by strong margins, and this is important considering that consumers have many options to choose from. As seen below, Kellogg’s 16.7% and 8.9% EBITDA and Net Income Margins both exceed the sector median, helping it to earn a B score for profitability. (Source: Seeking Alpha)

Kellogg isn’t going to post jaw-dropping growth, but nor is it going to send its investors to the poorhouse. This is reflected by reasonable growth during the third quarter, with currency-neutral sales and operating profit growing by a respectable 5% and 11% YoY. The higher operating margin growth drove impressive bottom-line growth, with currency-neutral adjusted EPS growing by 18% YoY. As seen below, Kellogg has seen a rebound in its bottom line EPS as cost pressures related to COVID last year have eased. It’s worth noting, however, Kellogg is not out of the woods, as it faces inflationary pressures from higher commodity costs. This is reflected by a drop in gross profit on a YoY basis. These pressures were more than offset by lower SG&A costs, which is why Kellogg saw a higher operating profit during the third quarter.

For reference, gross profit is equal to revenue minus cost of goods sold, whereas operating profit is equal to revenue minus costs of goods sold and operating expenses (including SG&A). In addition, the recent rise in COVID cases in select international countries and the U.S. could pressure Kellogg’s manufacturing operations, particularly in faster-growing emerging markets.

While these are near-term challenges to contend with, I see the long-term growth thesis as being intact. This is considering the strategic product portfolio, with strong growth momentum in the snacks category. Kellogg saw 12% 2-year compound annual growth in both the Cheez-It and Pop-Tarts brands in the U.S., and Pringles is seeing strong double-digit growth in a number of international markets, as seen below. (Source: Investor Presentation)

Plus, management is seeing strong pricing power, as the CEO noted that “Elasticity to our cost-related price increases have run lower than historical levels” during the recent conference call . Morningstar sees Kellogg’s competitive advantages persisting over at least the next 20 years, as noted in its recent analyst report: “Our wide moat rating reflects our confidence surrounding Kellogg’s ability to generate returns above its cost of capital (even under a more bearish set of assumptions) over the next two decades, stemming from its intangible assets and cost edge. We think its position as a leading packaged food manufacturer and its arsenal […]

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