Does Kellogg’s Still have its Crunch?

I am bullish on Kellogg’s Company (K) stock at $60 or less per share.

Kellogg’s is America’s largest and brand valuable company in the $1.1 trillion food industry. Kellogg’s owns the most market share of breakfast cereals but has a smaller market cap than the company trailing it. (See Analysts Top Stocks on TipRanks)

I recommend retail value investors buy food industry stocks (see my TipRanks articles on Budweiser (BUD), Yum! Brands (YUM), General Mills (GIS)). Kellogg’s is worth an investment at around $60.

People and pets eat every day, and Kellogg’s mission is to be the leading manufacture and seller of nutritious foods. In the manner of the dramatic, Kellogg’s boasts, “We’re one of the original plant-based well-being companies.”

Kellogg’s is an Identity

Kellogg’s stands at number five in global brand value, with its swarm of brands in its portfolio. Its cereals, snacks, loaves of bread, and frozen foods are household names, which are produced in 18 countries and sold in 180 worldwide. Among its best-known products are Frosted Flakes, Froot Loops, Pringles, Eggo, Morning Star, Pop-Tarts, and Rice Krispies.

A 2021 national survey of consumers reveals over eight million Americans devour 10 portions or more of Frosted flakes in a year; that amounts to one to four helpings per week.

According to a chart of the leading breakfast cereal companies in the U.S. from Statistica, K is number two ($22 billion) by market cap, but number one by market share. It could be that K tries harder.

For example, strategic acquisitions are expanding the brand recognition of Kellogg’s and sharpening the focus on nutritious products. Four years ago, Kellogg’s bought RXBAR for its line of protein bars and nutritious snacks. K acquired Pringles, food conglomerate Parati Group, Kashi organic cereals, and joint ventures with diversified foods company Tolaram Group to penetrate the African market.  

Slow, Steady Growth

The average Kellogg’s price target from seven Wall Street analysts is $65.88 per share. That implies an upside of about 7.5%. Six of the seven analysts recommend holding on to shares. One other analyst recommends buying.

I expect earnings will be lower in Q3 ’21 and into Q4 ’21. It is unfortunate, after management squeezed out higher EPS +2.23% in FY ’21 year-over-year. Revenue grew by 4.16%. The gross profit margin tops 34% and the net income margin is +9%.  (See TipRanks stock charts)  

The dividend yield is already at 3.72% and safe. Technicals are in positive territory, while ROE asset growth is 41.75%.

Hedge fund activity has been blah for quite a while. In part, it is because of the ~5% slide in K’s share price over the past 52 weeks. Funds’ holdings of K stock grew in ’21 along with the upswing in the share price and concomitantly has dwindled as the share price fell.

Finish the Bowl

My long-term sentiment is bullish. In the near term, the share price might stumble to the high $50s. It wandered in that range in the first three months of ’21. Strong financials sparked the share price climb to the upper $60s. A labor strike, supply chain fears, inflation, and raw materials cost increases combined to drive the share price down about 10%. Any further stumbling makes the stock a better buy. But beware, short interest for the stock climbed to +5.3%. (See the Smart Score from TipRanks)  

Overall, the company is profitable, but growth and momentum are slow. Slow growth, stalled labor negotiations, and supply chain disruptions can suppress the stock price. According to some sources, the labor unrest is as much about working conditions as salaries.

Additionally, Kellogg’s might be a takeover target at some point. In fact, the food and beverage industry closed 369 M&A deals in Q2 ’21, surpassing pre-COVID levels. One possible company that could take it over is Post (POST). With a $6.47 billion market cap, Post boasts an average price target of $124 per share.   

Kellogg’s is generally a low-risk stock, as the company’s business performance in recent quarters is showing strength. Revenue is growing in its emerging markets, the company maintains a solid balance sheet, and management is expanding nutritious snacks and plant-based protein foods.

The company is profitable, has built strong cash flow, and is undervalued. Slow growth, strong market share, high brand value, and profitability are the ingredients for a scrumptious delectable.

Disclosure: At the time of publication, Harold Goldmeier did not have a position in any of the securities mentioned in this article.

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