Kellogg's: Is it time to scoop up the stock?

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 question 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 investigate Kellogg's. Before I get started on the analysis, I should mention that I'm a vegetarian, which means I like companies that operated in a sector such as 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 being Beyond Meat. However, it is a very small part of my portfolio. If you are interested in seeing or copying my portfolio, you can see how to do so here.

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 know. The company headquarter is 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 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. It should be mentioned that Kellogg's expects to spinoff their North American Cereal division into its own company later this year. Thus, Kellogg's will be a different company later this year.

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.

I believe that Kellogg's has strong brand moat. And we have faith in the management. Now let us investigate the numbers to see, if Kellogg's does live 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 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 the years. Kellogg's has delivered a mixed ROIC in the last 10 years, as they only live up to 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 ROIC has been upped a notch since 2017, as it hasn't been below 8 % since. In 2022 Kellogg's delivered a ROIC below the requirement but 2022 was a hard year for most companies, so I won't give it too much importance. Nonetheless, I would like to see Kellogg's delivering a higher ROIC moving forward.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. Kellogg's reached a high equity in 2013, which wasn't topped until 2021. However, it is nice to see that Kellogg's has grown their equity every year since 2017.

Finally, we investigate the free cash flow. In short, free cash flow is the cash a company generates after it has paid for operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has left remaining after paying all of its financial obligations, I use the margin for it to make more sense. Free cash flow yield is the free cash flow per share a company is expected to earn against its market value per share. Kellogg's only had one year with negative free cash flow in the last ten years, and it was back in 2017. Kellogg's reached their highest free cash flow in 2020 and it has since decreased a bit, as have the levered free cash flow margin. The free cash flow yield is relatively high though, which could indicate that Kellogg's shares are relatively cheap, but we get back to that later in the analysis.

Another important thing to investigate 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 earnings. Doing the calculation on Kellogg's, I can see that Kellogg's has 5,54 years earnings in debt. It is a bit higher than we would like, and while it may not be alarming it is something I wouldn't be comfortable with if I invested in Kellogg's and something I would need to monitor.

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. One risk is macroeconomics. Kellogg's mentioned that in 2022 they experienced unusually high input costs due to high 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 stays high, if we continue to see supply chain bottlenecks that increases prices on commodities, and the U.S. dollar continues to be strong, it will affect Kellogg's. Another risk is the high debt. In his book Rule # 1 investing, Phil Town mentions the following on 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 don't like unpredictability, and while I don't think that Kellogg's will go bankrupt, I really don't like to see companies with such a large debt unless there is a reason to it, like an acquisition. Furthermore, management mentioned that interest expenses will increase substantially because of the rise in interest rates worldwide. Finally, Competition is also a risk. The markets that Kellogg's operate in is highly competitive. Especially private labels could be something that will take market shares from Kellogg's if we see economic headwinds for a longer time. Consumers may need to choose the cheaper alternative if they have less money to spend on food.

There are also reasons to invest in Kellogg's. Should perform well during a recession. We are technically in a recession in the United States. Hence, it is worth looking at companies that should perform well during recessionary periods as people tend to eat at home more often, which should be good for Kellogg's. Furthermore, Kellogg's is an old company that has survived through recessions, depressions, and world wars. What most people may not know is that Kellogg's is often mentioned as a prime example on how to come out stronger from a depression. During the depression area in the 1920's, 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 invest heavily in a new product called Rice Krispies. Rice Krispies became a massive success and Kellogg's ended up being the dominant market leader. Will Kellogg's do the same again? I don't know but they should perform well during recession regardless. The spinoff could unlock value. As mentioned previously, Kellogg's will spinoff their North American cereal segment. I believe it is because management does not feel like their divisions are valued properly. Hence, from spinning off the North American cereal segment, the individual stock value could eventually surpass the value they had when part of the parent company. Furthermore, the North American cereal division has a strong brand moat but isn't growing at the same pace as the snack division or the plant-based division. Thus, when spinning off the North American cereal segment, the rest of the company could be more attractive. High growth in plant-based food. The plant-based food division is still a small division in Kellogg's. However, it could grow significantly higher over time. According to Future Market Insights, the plant-based food market is expected to grow by 12,2 % CAGR until 2033. Thus, it could be a growth catalyst for Kellogg's moving forward.

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 as it is now at 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), 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 $8,17, 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 $4,09 (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". 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 was 488. I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I couldn't 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 341,6 in our further calculations. The Tax Provision was 244. We have 341,8 outstanding shares. Hence, the calculation will be like this: (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 the Free Cash Flow Per Share at 3,41 and a growth rate of 4 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $32,68.

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 short-term macroeconomic risks if investing in Kellogg's, and I would really like to see management paying off debt. However, Kellogg's could be a good stock to hold during a recession as it should perform well. Personally, I see the spinoff as interesting as I believe their snack division and plant-based food division are more interesting than their cereal division. Due to the spinoff, I may open a position if Kellogg's should drop to the TEN CAP price of $45,45. If Kellogg's doesn't drop to that price, I feel like there are better opportunities elsewhere.

My personal goal with investing is financial freedom. It also means that to obtain that, I do different things to build my wealth. If you have some extra hours to spare each month, you can turn a few hours a week into a substantial amount of money in a few years. If you are interested to know how to do it, you can read this post.

I hope that you enjoyed my analysis. Unfortunately, I cannot do a post of all the companies I analyze. I am available to copy but if you do your own trades, you can follow me on Twitter instead, as I tweet when I buy or sell anything.

Some of the greatest investors in the world believe in karma, and in order to receive, you will have to give (Warren Buffett and Mohnish Pabrai are great examples). If you appreciated my analysis and want to get some good karma, I would kindly ask you to donate a bit to Helping Rhinos. The organization is doing a great job in preserving and protecting rhinos, and is an organization I donate to myself. If you have enjoyed the analysis and want some good karma, I hope that you will donate a little to these wonderful animals through Helping Rhinos here. Even a little will make a huge difference to save these wonderful animals. Thank you.