Which Cereal Is Best for Your Portfolio?

Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Breakfast cereal has been around since the 1890s. It's an everyday staple for people all around the globe. While investors are out searching for the next Netflix, more prudent investors are looking for the next company that will be around in the next 100 years. Technology comes and goes, but breakfast cereal is here to stay.

The first breakfast cereal

Post (NYSE: POST) has been in business since 1895 and introduced the first breakfast cereal, Grape-Nuts, in 1897. The company still makes Grape-Nuts in addition to Honey Bunches of Oats, Post Bran Flakes, Post Raisin Bran, Post Selects, and Post Shredded Wheat among others. According to Nielsen, Post has 10.5% of the U.S. breakfast-cereal market.

In the most recent quarter, net sales and gross profit both decreased. Even though Post sold 3% more cereal than the prior quarter, selling prices were 4% lower. Gross profit decreased 8% to $102.5 million due to an unfavorable product mix and higher trade spending. Post spent more capital getting new products onto store shelves. It was also impacted by higher grain prices for its cereals.

Going forward, Post will achieve savings from the closing of its Modesto, Calif. manufacturing facility. Manufacturing will be transferred to other facilities and the company will save $14 million annually starting in 2015. Post will also see benefits from its acquisition of the private-label and branded cereal, granola and snack business of Hearthside Food Solutions. Post will merge these brands with the Attune Foods business it acquired last December. This transaction will add approximately $70 million to net sales and $17 million to $19 million in EBITDA.

In the next quarter, Post just announced that it expects net sales of between $252 million and $258 million. This compares to $241.9 million in the same quarter last year.

Post plans to continue looking for more acquisitions. Fund manager Mario Gabelli is a fan of CEO Bill Stiritz and told CNBC:

I also like to buy an individual that is a gifted CEO. I bet you he's going to put together a a very interesting company over the next three-or-four years.

Another century old company

General Mills (NYSE: GIS) traces its roots back to 1880 with its Gold Medal flour and remains the top-selling flour brand in the U.S. Its breakfast cereals now serve up to 60 million servings each day. Its cereal brands include Cheerios, Wheaties, Chex, Total, and Cinnamon Toast Crunch. Besides breakfast cereal, other brands include Yoplait yogurt, Pillsbury cookies, Green Giant vegetables, Nature Valley bars, and Haagen-Dazs ice cream.

General Mills' management is optimistic going forward. Just five years ago, only 25% of total sales came from outside the U.S. Today, one-third of sales comes from outside the U.S. Sales are forecast to exceed $18 billion for this fiscal year compared to $17.8 billion last year. Earnings for the year are forecast to be between $2.87 and $2.90 per share. This is an increase from $2.79 per share last year.

The company's focus for growth is on new product launches rather than acquisitions like Post. This year, General Mills will launch more than 200 new products. In the cereal category, new launches will include Hershey's Cookies & Creme along with two varieties of Nature Valley granola cereal with 10 grams of protein per serving. The company plans to also expand the distribution of its BFast breakfast shake that combines a bowl of cereal with milk.

General Mills is also looking to increase its sales outside the U.S. with its partnership with Nestle. This joint venture is focused on building the cereal market in more than 130 countries. This is a great partnership because it combines the breakfast cereals from General Mills with Nestle's expertise in emerging markets.

Making corn flakes since the early 1900s

Kellogg (NYSE: K) has been making breakfast cereal since 1906. Its cereal brands include Kellogg's Corn Flakes, Special K, Rice Krispies, Mini-Wheats, Frosted Flakes and Froot Loops. Outside of breakfast cereals, its brands include Pop-Tarts, Famous Amos, Keebler, Pringles, and Cheez-It.

In the first quarter of this year, overall sales grew 12% and organic sales increased 2.2%. Growth was seen across all geographic regions in which the company operates. The strongest brand was Pringles, which the company acquired from Procter & Gamble. Pringles' organic sales grew 7%.

For the rest of the year, Kellogg is forecasting total sales growth of 7% and organic sales growth of 3%. Earnings are expected to grow between 5% and 7%. Cash flow for the year is expected to be between $1.1 billion and $1.2 billion. Kellogg also authorized a share buyback of $1 billion, which expires next April.

Going forward, the focus for Kellogg is product innovation and growing the Pringles brand. Kellogg just launched Special K Nourish hot cereals and bars along with Kellogg's To Go shakes. These products are targeting adult consumers who want a healthy way to start their day. Kellogg is looking to also establish new businesses in the savory-snacks business and single-serve beverage business.

Foolish assessment

I think Post has the most upside among the three cereal companies. It is looking to grow the top and bottom lines through strategic acquisitions. By doing so, CEO Stiritz is going to make Post an attractive takeover target by itself. The company has a great cereal business and I see it being a great fit with a larger company.

General Mills continues to impress with its product innovations. The 3% dividend yield helps as well and with a 47% payout ratio, I see the dividend increasing.

Kellogg would be my last choice of the three to own. I like the product innovations coming from General Mills better than the innovations from Kellogg. General Mills is also cheaper with a P/E of 18 compared to a P/E of 26 for Kellogg. They both have roughly $7.5 billion to $8 billion in debt, but General Mills has $3 billion in more sales. General Mills also has almost $500 million more cash on the balance sheet than Kellogg. For these reasons, I would own General Mills over Kellogg.

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Mark Yagalla has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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