Will Kellogg Continue To Offer Investors Tasty Returns?

With shares of Kellogg Company (NYSE:K) trading at around $56.15 is KEG 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

Kellogg is constantly thinking of new ways to grow. While investors look at this company as a dividend play with a 3.10 percent yield, Kellogg is very innovative. They have a slate of new products being introduced, including Mini-Wheats Crunch, Pop-Tarts Oatmeal Delights, Scooby Doo cereal, Special K Chocolate Strawberry cereal and Kellogg’s Brown Sugar Cinnamon Jacks. The Mini-Wheats Crunch will offer a sweet taste and fiber, which is a key combination in today’s market. The Scooby Doo cereal will offer whole grain and only six grams of sugar without sacrificing taste. Out of these five products, at least one of is likely to be a big hit. Kellogg already had a big hit recently with Krave cereal. It was the most successful cereal launch in 20 years. Kellogg hopes to build on that momentum, and they probably will.

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While things are looking up for Kellogg, there are some concerns. Let’s take a look.

E = Equity to Debt Ratio Is Weak

The debt-to-equity ratio for Kellogg is high. It’s also higher than the debt-to-equity ratio for competitors, General Mills (NYSE:GIS) and Ralcorp Holdings (NYSE:RAH). The balance sheet for Kellogg also leaves much to be desired.

Debt-To-Equity

Cash

Long-Term Debt

K

3.23

$305 Million

$7.94 Billion

GIS

1.21

$1.51 Billion

$6.90 Billion

RAH

1.23

$352 Million

$1.98 Billion

 

T = Technicals on the Stock Chart Are Good

Kellogg has performed well over the past three years. You’re never going to see astronomical gains here, but if you’re looking for consistency, then this is one of the first places to look.

1 Month

Year-To-Date

1 Year

3 Year

K

5.77%

14.72%

16.47%

16.52%

GIS

3.87%

4.48%

4.46%

30.60%

RAH

25.74%

4.39%

6.47%

53.85%

 

At 56.15, Kellogg is currently trading above all its averages.

50-Day SMA

53.38

100-Day SMA

51.69

200-Day SMA

51.33

 

E = Earnings and Revenue Are Consistent

Kellogg has seen consistent annual revenue and earnings growth. 2011 was especially impressive in regards to revenue.

2007

2008

2009

2010

2011

Revenue ($)in billions

11.78

12.82

12.58

12.40

13.20

Diluted EPS ($)

.92

-3.30

1.35

1.09

1.28

 

Revenue and earnings have also been consistent on a quarterly basis. There was improvement in both areas in Q3 YoY.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in billions

3.31

3.02

3.44

3.47

3.72

Diluted EPS ($)

.80

.64

1.00

.84

.82

 

T = Trends Support the Industry

When it comes to consumer goods, trends almost always support the industry. In the case of Kellogg, even if we were in the worst of economic times, people would buy cereal. It’s affordable and healthy (in most cases.) The industry also held up relatively well in the financial crisis of 2008, which is a good sign considering the upcoming fiscal cliff.

Conclusion

On the positive side, we see revenue growth, good valuation with a Trailing P/E of 16.8 and a Forward P/E of 15.47, impressive stock performance through the years, $1.70 billion in cash flow and a low beta.

On the negative side, the debt-to-equity ratio is weak and the balance sheet is in bad shape. However, this will be offset by revenue growth and cash flow.

Kellogg has been around since 1906 and has over 30,000 employees. Kellogg’s track record is superb. If there was ever real cause for concern in regards to stock performance, they cut easily cut costs. Considering all factors, Kellogg is an OUTPERFORM.

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