Kellogg's: Is it time to scoop up the stock?
Opdateret: 7. aug.
I am currently researching companies that produce plant-based proteins because I believe it is a sector that will thrive in the future. While Kellogg's is most known for its other products, they are also producing plant-based protein. The question is whether it is time to add some Kellogg's to your portfolio.
This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.
As you probably know by now, I prefer companies that are well-established and have a long history. If you can find a company in a sector that you are bullish on, I think it's worth taking a look at the company. Hence, I have decided to investigate Kellogg's. Before I get started on the analysis, I should mention that I'm a vegetarian. This means that I prefercompanies that operate in sectors like Kellogg's. And while I have never owned Kellogg's, I do own shares in a company that operates in the plant-based protein sector, namely Beyond Meat. However, it is only a small portion of my portfolio.If you are interested in viewing or copying my portfolio, you can find instructions on how to do so here. If you want to purchase shares or fractional shares of Kellogg's, you can do so through eToro. eToro is very user-friendly and easy to get started with. You can start with as little as $50. Click on the picture below to get started.
I suppose most people are familiar with Kellogg's because of their cereals, but they also have other popular brands that fall under the category of convenience food. These include Pringles, Pop-Tarts, and Cheez-It, which are well-known brands. The company headquarters are in Michigan, United States, but they also have corporate offices located around the world. It was founded in 1906, meaning that it has more than 100 years of history and has operated in all sorts of macroeconomic environments. I believe that Kellogg's has a strong brand moat. Kellogg's is likely to be mentioned if youask anyone around the world to name a cereal company. Besides producing cereals and snacks, they have also launched their plant-based meat called Incogmeato. While you may either like the name or not, I find it interesting that they have entered the sector, even though I haven't tried the product myself. Plant-based protein is undoubtedly a highly competitive industry, but what I appreciate about Kellogg's is that they do not use genetically modified soy in any of their Incogmeato products. It should be mentioned that Kellogg's expects to spin off its North American Cereal division into its own company later this year. Thus, Kellogg's will become a different company later this year.
Their CEO is Steve Cahillane. He joined Kellogg's as CEO in 2017. He has a Bachelor of Arts in Political Science fromNorthwestern University and a Master of Business Administration from Harvard University. Prior to arriving at Kellogg's,he held leadership positions in AB InBev, Coca-Cola, and The Nature's Bounty Co. Besides being a CEO and Chairman of the Board at Kellogg's, he also serves on the boards of Northwestern University and The Consumer Goods Forum. He is known to be an expert in accounting, risk management, and branded consumer products. While I haven't been able to find much about his leadership style, I have watched some interviews with him. He often mentions how he learns a lot by listening to employees in all sorts of positions and how it gives him inspiration to move Kellogg's forward. On a personal note, I appreciate this type of leadership. Combined with his extensive experience in consumer products and educational background, I have confidence in Steve Cahillane's ability to propel Kellogg's forward.
I believe that Kellogg's has a strong brand moat. And we have faith in the management. Now let us investigate the numbers to see if Kellogg's lives up to our requirements for a strong moat. In case you want an explanation about what the numbers are, you can have a look at "MY STRATEGY" on the website.
The first number we will look into is the return on invested capital, also known as ROIC. We want to see 10 years of history, and we want the numbers to be above 10% in all the years. Kellogg's has delivered a mixed return on invested capital (ROIC) in the last 10 years, as they have only met the 10% requirement in five out of ten years. In the last ten years, Kellogg's delivered their best ROIC in 2013. However, it seems like their return on invested capital (ROIC) has improved since 2017, as it hasn't been below 8% since then. In 2022, Kellogg's delivered a return on invested capital (ROIC) below the requirement. However, it is important to note that 2022 was a challenging year for most companies, so I won't place too much emphasis on this. Nonetheless, I would like to see Kellogg's deliver a higher ROIC moving forward.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actualnumbers and the percentage growth year over year. Kellogg's reached a peak in equity in 2013, which was not surpasseduntil 2021. However, it is nice to see that Kellogg's has increased its equity every year since 2017.
Finally, we will investigate the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has remaining after paying all of its financial obligations. I use the margin to provide a clearer understanding. Free cash flow yield refers to the amount of free cash flow per share that a company is projected to generate in relation to its market value per share. Kellogg's had only one year of negative free cash flow in the last ten years, which occurred in 2017.Kellogg's reached its highest free cash flow in 2020, but it has since decreased slightly, along with the levered free cash flow margin. The free cash flow yield is relatively high, which could indicate that Kellogg's shares are relatively cheap. However, we will discuss this further in the analysis.
Another important aspect to investigate is the level of debt, specifically whether a business has a manageable debt that can be paid off within a period of 3 years. We do this by dividing the total long-term debt by earnings. Doing the calculation on Kellogg's, I can see that Kellogg's has 5,54 years of earnings in debt. It is slightly higher than our preference, and although it may not be alarming, it is something that would make me uncomfortable if I invested in Kellogg's. It is a factor that I would need to monitor closely.
Based on my findings thus far, I believe that Kellogg's is a reputable company. However, no investment is without risk,and Kellogg's also has its share of risks. One risk is macroeconomics. Kellogg's mentioned that in 2022, they experienced unusually high input costs due to inflation, while supply bottlenecks affected production. Furthermore, a strong dollar also affected profitability as foreign currency translation reduced net sales, operating profit, and earnings per share by 4% in 2022. Hence, if inflation remains high, if we continue to experience supply chain bottlenecks that increase prices on commodities, and if the U.S. dollar continues to strengthen, it will have an impact on Kellogg's. Another risk is the high level of debt. In his book "Rule #1 Investing," Phil Town mentions the following about debt: "A business that is carrying a lot of debt relative to its income has an unpredictable financial future. If there are any problems with the economy, a business with a lot of loans might be in big trouble". As an investor, I dislike unpredictability. Although I don't believe that Kellogg's will go bankrupt, I am concerned about companies with significant debt unless there is a justifiable reason, such as an acquisition. Furthermore, management mentioned that interest expenses will increase substantially due to the global rise in interest rates. Finally, competition is also a risk. The markets that Kellogg's operates in are highly competitive. Especially private labels could take market shares from Kellogg's, especially if we experience prolonged economic headwinds. Consumers may need to choose the more affordable alternative if they have a limited budget for food.
There are also reasons to invest in Kellogg's. Kellogg's should perform well during a recession. We are currently in a recession in the United States. Hence, it is worth considering companies that are likely to perform well during recessionary periods, as people tend to eat at home more frequently. This trend should benefit Kellogg's. Furthermore, Kellogg's is an established company that has endured recessions, depressions, and world wars. What most people may not know is that Kellogg's is often mentioned as a prime example of how to emerge stronger from a depression. During the Depression era in the 1920s, two companies dominated the breakfast cereal market: Kellogg's and Post. And while Post cut costs and focused on mergers and acquisitions, Kellogg's decided to make a significant investment in a new product called Rice Krispies. Rice Krispies became a massive success, and Kellogg's ended up becoming the dominant market leader. Will Kellogg's do the same again? I don't know, but they should perform well during a recession regardless. The spinoff could unlock value. As mentioned previously, Kellogg's will spin off its North American cereal segment. I believe it is because management does not feel that their divisions are valued properly. Hence, by spinning off the North American cereal segment, the individual stock value could eventually surpass the value it had when it was part of the parent company. Furthermore, the North American cereal division has a strong brand moat but is not growing at the same rate as the snack division or the plant-based division. Thus, when spinning off the North American cereal segment, the remaining portion of the company could become more appealing. High growth in the plant-based food industry. The plant-based food division is still a small division at Kellogg's. However, it could grow significantly higher over time. According to Future Market Insights, the plant-based food market is expected to grow at a CAGR of 12,2% until 2033. Thus, it could serve as a catalyst for growth for Kellogg's in the future.
All right, we have gone through the numbers, potential and risk regarding Kellogg's, and now it is time for us to calculate a price for Kellogg's. In order to calculate price, we will need the numbers that I have explained in the "MY STRATEGY" section of the website, as I do not want to go through the whole calculation here. I chose to use an EPS of 2,79, which is the one from 2022. I chose an estimated future EPS growth rate of 4% (which is what Steve Cahillane said was the growth rate in 2020 pre-pandemic), an estimated future PE of 8 (which is double the growth rate, as the historical PE for Kellogg's has been higher), and we already have the minimum acceptable return rate of 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $8,17. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Kellogg's at a price of $4,09 (or lower, of course) if we use the Margin of Safety price.
Our second way to calculate a buy price is the Ten Cap price, which is also explained at "MY STRATEGY". To do so, we need some numbers from their financial statements, keep in mind that all numbers are in millions. The operating cash flow last year was 1.651 The capital expenditures were 488. I tried to look through their annual reportto see how much of the capital expenditures were used on maintenance. I couldn't find it, though. As a rule of thumb, you can expect 70% of the capital expenditures to be used for maintenance. This means that we will use 341,6 in our further calculations. The tax provision was 244. We have 341,8 outstanding shares. Hence, the calculation will be as follows:(1.651 - 341,6 + 244) / 341,8 x 10 = $45,45 in Ten Cap price.
The last calculation is the Payback Time. I also described in "MY STRATEGY". With Kellogg's Free Cash Flow Per Share at 3,41 and a growth rate of 4%, if you want to recoup your investment in 8 years, the Payback Time price is $32,68.
I believe that Kellogg's is a great company with good management. I believe they will do well in the future due to furtherproduct development and their strong brand. There are some short-term macroeconomic risks associated with investing in Kellogg's, and I would strongly urge management to prioritize debt repayment. However, Kellogg's could be a good stock to hold during a recession as it should perform well. Personally, I find the spinoff interesting because I believe their snack division and plant-based food division are more intriguing than their cereal division. Due to the spinoff, I may consider opening a position if Kellogg's drops to the price of $45,45, which is the Ten Cap price. If Kellogg's doesn't drop to that price, I feel like there are better opportunities elsewhere.
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