Is it time to scoop up some Kellogg's?
Opdateret: 3. maj 2022
If you regularly read my posts, you would probably know that I'm currently looking into companies that make the plant-based proteins, as I believe it is a sector that will do well in the future. While Kellogg's is most known for other products, they are also producing plant-based protein. The questions is, if it is time to scoop up some Kellogg's for 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 like companies that are well-known and with a long history. If you can get such a company in a sector you are bullish on, I think the company is worth a look. Hence, I have decided to look into Kellogg's. Before I get started on the analysis, I should mention that I'm a vegetarian, which means I have a preference for companies that operated in a sector such as Kellogg's. And while I have never owned Kellogg's, I do own two other companies that operates in the plant-based protein sector being Beyond Meat and Archer-Daniels-Midland. I should also mention that Kellogg's is on my watchlist, as are many other companies that operates in the sector but it wont affect the analysis, as I will stay objective.
I guess everyone knows Kellogg's because of their cereals but they also have other well-known brands that can be labelled convenience food such as Pringles, Pop-Tarts and Cheez-It, which are brands that most people people know. The company's headquarter is located in Michigan, United States but they have corporate offices around the world. It was founded in 1906, meaning that is has more than 100 years of history and have operated in all sorts of macroeconomic environments. I believe that Kellogg's has a large brand moat. I mean try to ask anyone around the world to mention one cereal company, and I guess the chances are pretty high that they would mention Kellogg's. Besides producing cereals and snacks, they have also launched their plant-based meat called Incogmeato. While you either like the name or not, I do find it interesting that they have entered sector, even though I haven't tried the product myself. Plant-based protein is obviously a sector with a lot of competition but I like that Kellogg's doesn't use GMO soy in any of their Incogmeato products.
Their CEO is Steve Cahillane. He joined Kellogg's as a CEO in 2017. He has a Bachelor of Arts in Political Science from Northwestern University and a Master of Business Administration from Harvard University. Prior to arriving to 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 in Kellogg's, he also sits 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, and he often mentions how he learns a lot by listening to employers in all sorts of positions, and how it gives him inspiration to move Kellogg's forward. On a personal note, I like that kind of leadership and that combined with his vast experience in consumer products and his educational background, I do have faith in Steve Cahillane moving Kellogg's forward.
We now have determined that Kellogg's has strong brand moat. And we have faith in the the management. Now let us look into the big five numbers in order to see, if Kellogg's does live up to our requirements for a strong moat. In case you want an explanation about what the big five numbers are, you can have a look at "MY STRATEGY" on the website.
The first number we will look into is the return on investment capital, also known as ROIC. We want to see 10 years of history and we want the numbers to be above 10 % in all of the benchmarks. Kellogg's show a nice and steady ROIC that lives up to the requirements of having at least 10 % in each of the benchmarks, meaning looking at ROIC alone, Kellogg's seems to be an intriguing investment.
The next numbers we will look into are the Sales Growth Rates. Ideally the numbers should be above 10% in each benchmark and increasing. There are no way to sugarcoat it, the numbers are underwhelming. I would have liked to see better numbers but it isn't something that necessarily turns me away from Kellogg's, as it depends on all of the growth rates combined.
The next numbers are the EPS Growth Rates. As with all other growth rates we want the numbers to be above 10 % in all benchmarks. It is somewhat of a mixed bag. There are some bad benchmarks, and you have some good benchmarks. I wouldn't put too much attention into the latest benchmark, as Kellogg's benefitted a great deal from the pandemic and people having time to eating breakfast at home.
The Equity Growth Rate is the most important of the four growth rates. This is exactly what you would like to see in a company. The equity growth rate is great in all of the benchmarks, and looking at the 3 latest benchmarks they are also increasing. This should make you excited if you are planning on investing in Kellogg's.
Finally we look into the Cash Growth Rates. The numbers are all over the place. In the oldest benchmarks you have underwhelming numbers, while in the two latest the numbers are fantastic. The latest benchmarks give me confidence in Kellogg's, especially because the 3 years benchmark is actually higher than the 1 year benchmark that can be a bit skewed due to the pandemic.
To sum up the five numbers. The most important number will always be the ROIC, and the numbers are solid, as they are well above the required 10 % in each of the benchmarks. The equity growth rate is the most important growth rate, and Kellogg's have a impressing equity growth rate in all of the benchmarks. The EPS growth rate and the cash growth rate are both mixed bags with some good and some bad benchmarks. The sales growth rate is underwhelming in all of the benchmarks. If you combine the numbers, I would be interested in investing in Kellogg's if I could get it at the right price. The ROIC and the equity growth rates are fantastic, and as the cash growth rate and the EPS growth rates are mixed bags, I think it all in all make up for the underwhelming sales growth rate.
Another important thing to look into is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by current cash flow. Doing the calculation on Kellogg's, I can see that Kellogg's has 5,39 years earnings in debt. It is a bit higher than we would like but it isn't alarming. However, it is something you will need to monitor if investing in Kellogg's..
Based on my findings so far, I believe that Kellogg's is a good company. However, no investments are without risk and Kellogg's has some risks as well. As always it is a good idea to look into a company's annual report to see the risks they believe they are facing. I did so with Kellogg's and the risks that I believe are the largest for Kellogg's are: Competition, price of commodities and debt. They face competition from other branded products and private labels products. Especially private label products could hurt Kellogg's as they are cheaper, and could be something that consumers choose if we see economic headwinds. Price of commodities could be a problem for Kellogg's short-term, as it seems like the harvest in the Southern Hemisphere has been bad and combined with China stockpiling commodities, it could make the price of commodities to continue to rise. Finally, we previously mentioned debt to be higher than we would like, and according to their annual report it could impair with their ability to access global capital markets to obtain additional financing for working capital, capital expenditures or general corporate purposes.
In this section I would like to address the risks that Kellogg's faces. I'm not too worried about the risk of competition, especially not from other branded products, as we have already determined that Kellogg's has a large brand moat. Commodity prices are certainly a short-term risk, as they will probably go up. However, commodity prices go up and down, and if you invest in Kellogg's long-term, it shouldn't be worrisome in the long run. Debt could be a problem. Not that I believe Kellogg's will go bankrupt as they doesn't have that large of a debt but if they cannot borrow funds it could be a problem. However, it is hard to believe that Kellogg's with their goodwill doesn't have a chance to borrow funds if needed.
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 a EPS as it is now at 3,17. I chose a Estimated future EPS growth rate of 4 (which is what Steve Cahillane said was the growth rate in 2020 pre pandemic), Estimated future PE 8 (which the double of the growth rate, as the historically PE for Kellogg's has been higher) and we already have the minimum acceptable return rate on 15 %. Doing the calculations by using the formula I described in "MY STRATEGY" we come up with the sticker price (some call it fair value or intrinsic value) of $9,28, and we want to have a margin of safety on 50 % so we will divide it by 2, meaning that we want to buy Kellogg's at price of $4,64 (or lower obviously), 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". In order 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 1.986 The Capital Expenditures was 505. I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I wasn't able to find it though, so as a rule of thumb, you expect 70 % of the capital expenditures to be used on maintenance, meaning we will use 353,5 in our further calculations. The Tax Provision was 323. We have 340,36 outstanding shares. Hence, the calculation will be like this: (1.986 - 353,5 + 323) / 340,36 x 10 = $57,45 in TEN CAP price.
The last calculation is the PAYBACK TIME. I also described in "MY STRATEGY". With the Free Cash Flow Per Share at 2,74 and a growth rate of 4 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $26,26.
I believe that Kellogg's is a great company with a good management. I believe they will do good in the future due to further product developing and their strong brand. There are some slight short-term concerns about the rise of commodity prices though. However, based on my findings in this analysis, I would open a position at a price that is a little further below the Ten Cap price, meaning I would probably open a position around the $45-50 range. I would be comfortable at opening a position at that price, as I would get a little more than a 50 % discount to intrinsic value.
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