Is Kellogg Best of Breed?

With shares of Kellogg Company (NYSE:K) trading at around $63.66, is K an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Credit Suisse analyst Robert Moskow recently reiterated an Underperform rating on Kellogg, but raised his price target to $62 from $57. He stated, “Kellogg adjusted 1Q EPS of $0.99 missed consensus of $1.02, and management lowered expectations for second quarter, implying a very back-half loaded year. As we expressed in our January 28 report, there seems to be a disconnect between the market view that the 5-7 percent EPS growth guidance for 2013 is highly conservative, and the management view that it has guided ‘responsibly’ for a ‘normal year.’ We think that FY13 guidance is achievable, but not very beatable given the lack of excitement on the top-line and the uncertainty as to whether commodity deflation can drop to the bottom line. Fourth quarter looks particularly aggressive given that it may now imply as much as 40 percent EPS growth.”

Jeffries analyst Thilo Wrede recently reiterated a Hold rating on Kellogg and raised his price target to $68 from $60. He stated, “K’s 1Q13 adj. EPS of $0.99 missed expectations as the co. was dealing with inflation and, in our view, lower than expected sales. However, as inflation is abating and cost savings are ramping up, mgmt expects performance to improve over the course of the year. Nevertheless, results might still come under pressure because of the limited benefit of share repurchases due to the recent run up in share prices. Reit. Hold with new $68 PT.”

Kellogg has a strong brand portfolio, and the stock has shown decent resiliency in weak markets. It held up better than most stocks in 2008/early 2009, but it didn’t hold up as well as General Mills (NYSE:GIS).

Current negatives for Kellogg include margin contractions, cost inflation, fierce competition, poor debt management, and lackluster innovation.

Now let’s take a look at some numbers. The chart below compares fundamentals for Kellogg, General Mills, and ConAgra Foods (NYSE:CAG). Kellogg has a market cap of $22.99 billion, General Mills has a market cap of $32.66 million, and ConAgra has a market cap of $14.88 billion.

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K

GIS

CAG

Trailing   P/E

23.79

18.56

29.85

Forward   P/E

15.23

17.30

14.34

Profit   Margin

6.77%

10.41%

3.48%

ROE

44.93%

22.14%

9.87%

Operating   Cash Flow

$1.76 Billion

 $2.89 Billion

  $1.05   Billion

Dividend   Yield

2.70%

3.00%

2.80%

Short   Position

1.90%

1.50%

1.50%

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

E = Equity to Debt Ratio Is Weak  

The debt-to-equity ratio for Kellogg is weak, and this is a major concern. If and when interest rates increase, Kellogg could find itself in a challenging situation. General Mills is much better situation in this regard.

Debt-To-Equity

Cash

Long-Term Debt

K

3.17

$281.00 Million

$7.90 Billion

GIS

0.95

$751.20 Million

$8.06 Billion

CAG

2.07

$723.80 Million

$10.68 Billion

 

T = Technicals Are Strong   

Despite a weak performance over the past month, Kellogg has been a steady performer. However, it has underperformed its peers for every time frame listed below.

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1 Month

Year-To-Date

1 Year

3 Year

K

-0.55%

14.82%

30.49%

29.40%

GIS

4.17%

27.35%

36.59%

55.62%

CAG

3.70%

22.68%

41.98%

60.97%

 

At $63.66, Kellogg is trading above all its averages.

50-Day   SMA

63.29

100-Day   SMA

60.48

200-Day   SMA

56.09

 

E = Earnings Have Been Steady               

Earnings have been steady without being overly impressive on an annual basis. Revenue has been impressive over the past two years.

2008

2009

2010

2011

2012

Revenue
($)in   billions

12.82

12.58

12.40

13.20

14.20

Diluted   EPS ($)

2.99

3.16

3.40

2.38

2.67

 

 

3/2012

6/2012

9/2012

12/2012

3/2013

Revenue   ($)in   billions

3.44

3.47

3.72

3.56

3.86

Diluted   EPS ($)

1.00

0.84

0.82

0.02

0.85

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

This is a defensive industry, but only Kraft Foods Group (NASDAQ:KRFT) has beaten estimates as of late. Overall, people need to eat. Therefore, the industry should be fine. On the other hand, many stores are now offering more generic brands. If the consumer weakens, then they might opt for cheaper alternatives.

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Conclusion

Kellogg is a quality company with many superb brands to its name, but the stock’s momentum is beginning to fade and debt management has been subpar. Innovation would have the potential to lead to increased revenue, which could then help pay off debt. However, the innovation isn’t there. Kellogg does offer a generous 2.70 percent yield, but it’s not as generous as the 3.00 yield offered by General Mills. General Mills has also performed better over the past three years, and it has better debt management, which will likely mean more resiliency in a weak market.

Kellogg is a WAIT AND SEE. General Mills looks to be a better option at this point in time.

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Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I do not have a position in this stock. I am currently short technology, financials, the Russell 2000, and the euro.