Is Kellogg Well-Positioned for the Future?

With shares of Kellogg (NYSE:K) trading around $59, 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:

T = Trends for a Stock’s Movement

Kellogg is engaged in the manufacture and marketing of ready-to-eat cereal and convenience foods. Kellogg’s principal products are cereals, cookies, crackers, toaster pastries, cereal bars, fruit-flavored snacks, frozen waffles, and veggie foods. It also markets under other brands such as: Keebler, Cheez-It, Murray, Austin, and Famous Amos to supermarkets in the United States. The company’s cereal products are generally marketed under the Kellogg’s name and are sold principally through direct sales forces for resale to consumers. As of this year, their products were manufactured in 17 countries and marketed in more than 180 countries. Convenience food continues to see increased demand so a company like Kellogg that can provide these products at affordable prices across the globe stands to make significant profits.

Kellogg won’t buy palm oil at the expense of rain forests. Palm oil is an additive used in a number of processed foods, but is not a recommended substitute for trans fats according to research done by the USDA. The cultivation of palm oil has been highly criticized because of the effects it has on rain forests, which include deforestation, loss of natural habitats, and the increased emission of greenhouse gases. In Indonesia and Malaysia, palm oil cultivation has wiped out over 30,000 acres of rain forest. In efforts to better protect the environment, leaders at Kellogg announced last week that they will only purchase palm oil from companies that have been verified to protect the environment and save the rain forests. Kellogg plans to be in complete compliance with this new standard by 2015.

Palm oil is used in Kellogg products like Pop-Tarts, cookies, and waffles; it’s not commonly found cereals. Green Century Capital Management reports that palm oil brings in about $50 million dollars in revenue annually with its use in more than half of the packaged foods on the market.

T = Technicals on the Stock Chart Are Mixed

Kellogg stock has struggled to make significant progress over the last couple of months. The stock has is currently surging higher and looks set to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Kellogg is trading between its rising key averages which signal neutral price action in the near-term.

K

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Kellogg options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Kellogg options

16.07%

23%

20%

What does this mean? This means that investors or traders are buying a minimal amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

March Options

Average

Average

April Options

Average

Average

As of today, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a minimal amount of call and put option contracts and are leaning neutral over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Kellogg’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Kellogg look like and more importantly, how did the markets like these numbers?

2013 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

2,628.22%

1.12%

6.67%

-13.27%

Revenue Growth (Y-O-Y)

-1.74%

-0.11%

6.91%

12.24%

Earnings Reaction

0.64%

0.69%

-1.23%

-1.84%

Kellogg has seen increasing earnings and mixed revenue figures over the last four quarters. From these numbers, the markets have had conflicting feelings about Kellogg’s recent earnings announcements.

P = Average Relative Performance Versus Peers and Sector

How has Kellogg stock done relative to its peers, General Mills (NYSE:GIS), Post (NYSE:POST), Mondelez (NASDAQ:MDLZ), and sector?

Kellogg

General Mills

Post

Mondelez

Sector

Year-to-Date Return

-1.87%

-1.18%

12.56%

-3.20%

2.57%

Kellogg has been an average performer, year-to-date.

Conclusion

Kellogg provides essential food products that consumers enjoy all around the world. The company won’t buy palm oil at the expense of rain forests. The stock has struggled to make significant progress over the last couple of months, but is currently surging higher. Over the last four quarters, earnings have been rising while revenues have been mixed which has produced conflicting feelings among investors. Relative to its peers and sector, Kellogg has been an average year-to-date performer. WAIT AND SEE what Kellogg does this quarter.

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