A Quiet Yet Consistent Winner

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

Kellogg (NYSE: K) is an impressive, brand-centric company. So let's go over some details and determine whether or not it's likely to enjoy future success. We'll also determine if Kellogg is likely to be a better investment option than its peers going forward.

An easy to understand situation

Kellogg’s biggest challenge has been cost inflation. From 2011 to early 2013, commodity costs have increased, which impeded the company’s growth. But, if you’re looking at the big picture, Kellogg has done just fine.

Not only has revenue increased over the past two years, but it consistently delivers strong profits. Earnings declined in 2012, but commodity costs have been coming down, which should help the bottom-line going forward. That said, top-line growth might present more of a challenge.

While the above news can be looked at as a mix between positive and negative, there are several definitive positives for Kellogg, one of those being improved innovation. For many years, analysts called out Kellogg for not doing enough to change. But Kellogg has finally responded.

One of its most interesting recent innovations is Eggo’s Chocolatey Chip Muffins, which are tear-apart waffle bars that don’t require syrup. The simple brilliance behind this concept is that it fits today’s rushed lifestyle and it provides a quick breakfast prior to heading out the door (yes, they must be toasted).

On the healthy side, Kashi’s (owned by Kellogg) Moroccan Minestrone and Savory Chicken Noodle frozen soups are geared to offer convenience for health-conscious adults. The Moroccan Minestrone Soup is filled with vegetables, fiber, whole grains, and protein.

On the management side, Kellogg is looking to cut costs. This, combined with expected commodity cost deflation, should help boost the bottom line. If you’re looking for dividends, Kellogg currently yields 2.60%. However, with a debt-to-equity ratio of 2.66 versus an industry average of 0.9, Kellogg isn’t displaying top-notch fiscal responsibility. If economic conditions were to worsen, then Kellogg’s debt could strain its working capital.

Other options

General Mills (NYSE: GIS), owner of Cheerios, Wheaties, Pillsbury, Nature Valley, Betty Crocker, Green Giant, Fiber One, and much more, has displayed more consistent revenue growth over the years. Earnings recently dropped, but profits are always strong. General Mills currently yields 3%, and its debt-to-equity ratio stands at 0.98, which indicates more fiscal responsibility than Kellogg. Therefore, General Mills is more able to increase capital returns in the future.

General Mills has outperformed Kellogg all-time in regards to stock appreciation (though both are very impressive), and General Mills only dropped 20% during the height of the financial crisis, whereas Kellogg plummeted 30%. Yet both of these decreases show great resiliency considering the broader market fell by at least 50%.

General Mills has shown consistent organic growth and it’s always looking for acquisition opportunities. Like Kellogg, General Mills is focused on cutting costs which should lead to an improved bottom line and stock appreciation. And if it doesn’t, then at least you have a generous dividend payment to help ease the pain.

Mondelez International (NASDAQ: MDLZ) spun-off Kraft Foods last October. Since that time, Mondelez has delivered underwhelming results, yet the stock has delivered solid returns for investors. Mondelez only yields 1.70%, which is better than nothing. And with a debt-to-equity ratio of 0.58, debt management has been very good. As long as the top-line grows, there's a good chance of more capital being returned to shareholders.

The biggest news for Mondelez is that Nelson Peltz wants PepsiCo to purchase the company and divest its carbonated beverage operations. In his view, this would allow Pepsi to completely dominate the snack segment. This news has aided Mondelez's stock, but Pepsi has clearly stated that it’s not interested.

Even if Pepsi doesn’t purchase Mondelez, the company has many strong brands, including Chips Ahoy!, Oreo, Ritz, Cheese Nips, Triscuit, Nilla, Certs, and Cadbury. The biggest challenge for Mondelez right now is management transitioning from a domestic to an international operation (most of the management team is from Kraft). Eventually, Mondelez should get its act together and without any outside help.

Conclusion

All three companies are likely to reward investors over the long haul, but Kellogg and General Mills are safer bets thanks to their stellar long-term track records and dedication to catering to health-conscious consumers. Both companies are marketing to industry trends, and both brand portfolios are very impressive. Ultimately, General Mills might offer a slight edge thanks to its more consistent top-line growth, higher yield, and better debt management.

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Dan Moskowitz 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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