Cereal makers and packaged food companies gained immensely from the stock-piling tendencies of consumers amid lockdowns. Even after easing of lockdown restrictions, the demand for packaged food and at-home eating might continue to be strong as many people are avoiding eating outside given the rising COVID cases. However, the growth momentum could pull back as dining in restaurants improves gradually.
We will discuss how Kellogg and General Mills have performed recently and use the TipRanks’ Stock Comparison tool to see which consumer staples stock offers a better investment opportunity.
Kellogg (K)
Pandemic-led demand for Kellogg’s products has improved the packaged food company’s prospects after a lackluster sales growth of 0.2% (organic growth of 1.9%) in 2019. The organic revenue growth excludes the impact of the divestiture of the company’s cookies, fruit snacks, pie crusts, and ice cream cones businesses to Ferrero International last year. Kellogg has been streamlining its product portfolio to focus on high-growth categories.
Fiscal second-quarter revenue grew by only 0.1% to $3.47 billion on a reported basis but excluding the impact of currency headwinds and divestitures, organic sales growth was an impressive 9.2%. Adjusted EPS increased 25.3% to $1.24 in the quarter.
Overall, elevated at-home demand for packaged foods, especially cereal foods and frozen foods, drove an organic sales growth of 8.6% in the first half of fiscal 2020 (ended June 27) and helped Kellogg raise its full-year organic sales growth outlook to 5% from the previous growth forecast of 1% to 2%.
However, the company, which owns brands like Pringles, Cheez-It, and Eggo, cautioned that its bottom line in the second half of the year might be weighed down by brand-building investments that were shifted from the first half to second half.
Meanwhile, investors are excited about the launch of Kellogg-owned MorningStar Farms’ Incogmeato range of plant-based burger patties and chicken alternatives. The launch of Incogmeato was delayed from early 2020 to the second half of the year due to the pandemic. The Incogmeato line of products will help Kellogg capture the demand for alternative meat and will compete with Beyond Meat and Impossible Foods. (See K stock analysis on TipRanks)
On August 29, Citigroup analyst Wendy Nicholson initiated coverage of Kellogg stock with a Buy rating and a price target of $79. The analyst stated, “To the extent K’s market share performance improves in coming quarters as reinvestment initiatives have impact, we think K has room to make up for some of the weakness in its share price YTD,”
Kellogg stock has fallen 5.4% year-to-date but has a possible upside of 10.5% ahead as implied by the average analyst price target of $72.33. Overall, the Street has a Moderate Buy consensus for Kellogg which breaks down into 5 Buys, 5 Holds and 2 Sells.
General Mills (GIS)
The pandemic gave a much-needed boost to General Mills, which owns several well-known brands like Cheerios, Nature Valley, Yoplait, and Haagen-Dazs. A shift to healthier food options and competition from private labels put pressure on the packaged-food giant over recent years. The company’s efforts to improve its top-line included the addition of better food products and the acquisition of premium-pet food company Blue Buffalo.
Despite the negative impact on away-from-home demand (which accounted for 15% of pre-COVID sales), General Mills’ sales for fiscal 2020’s fourth quarter (ended May 31) surged 20.7% to $5.0 billion thanks to a spike in at-home channel demand. Adjusted EPS grew 32.5% Y/Y to $1.10. Overall, the company ended fiscal 2020 with reported sales growth of about 5% and organic net sales growth of 4%.
Though General Mills did not issue any specific outlook for fiscal 2021, it expects elevated demand for food-at-home compared to pre-pandemic levels due to concerns about virus transmission and recession.
Meanwhile, the company’s growth initiatives include the roll-out of innovative products like Nature Valley Packed, which is a “sustained” energy bar and Ratio Keto Yogurt. General Mills continues to improve its margins through its Holistic Margin Management program and aims to reduce its leverage by bringing down its net-debt-to-adjusted-EBITDA ratio to below 3.2x in fiscal 2021.
On August 29, Citigroup analyst Wendy Nicholson initiated coverage of General Mills with a Hold rating and a price target of $70. The analyst noted that the company’s premium pet food, especially its Blue Buffalo brand, have benefited from strong e-commerce sales amid the pandemic and that the company “has also gained market share in several of its core categories owing to superior execution throughout the pandemic,”
However, with the stock’s run in recent months, the analyst believes that the valuation is largely reflected in the strong performance. (See GIS stock analysis on TipRanks)
On the other hand, the Street has a Moderate Buy consensus with 2 Buys, 6 Hold and no Sell ratings. General Mills stock has risen 9.3% since the start of this year and the average analyst price target of $66.63 reflects a further upside potential of about 14% in the coming months.
The better food stock
Both Kellogg and General Mills have a Moderate Buy consensus. Kellogg’s dividend yield is 3.48% compared to General Mills’ 3.35%. But a greater upside potential in General Mills stock and a lower valuation right now (as indicated by the TipRanks Stock Comparison tool) make General Mills a more favorable investment than Kellogg.
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment
