Kellogg: Strengths, Weaknesses, Opportunities, Threats

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

A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, and threats, and is a great way to gain a detailed and thorough perspective on a company and its future. Fresh off a solid third quarter earnings report, I would like to pinpoint one of the largest cereal manufacturers in the world: Kellogg (NYSE: K).

Strengths:

  • Solid Revenue Growth: In 2006, Kellogg reported revenue of $10.907 billion; in 2011, the company reported revenue of $13.198 billion, representing year over year annual growth of 3.89%, a stable and secure rate that is projected to sustain into the future
  • Brand Loyalty: Kellogg’s iconic red logo can be found on the majority of the cereal boxes in your local supermarket, and drives customers back again and again
  • Geographic Diversity: The company’s products are marketed and sold in more than 180 countries around the world; the company will not be seriously hurt by economic problems exclusive to one market or country
  • Dividend: Kellogg currently pays out quarterly dividends of $0.44, which when annualized puts the dividend yield at 3.29%, which is significantly north of any rate that can be found in a CD or treasury bond
  • Institutional Vote of Confidence: 78% of shares outstanding are held by institutional investors, displaying the confidence long-term and big-money investors have in the company and its future  

Weaknesses:

  • Saturation of Market: Kellogg’s products are already in nearly every market around the world, so there is little room left for geographical expansion
  • Debt: The company currently possesses around $7.366 billion of debt on its balance sheets, and until they pay down this debt it will weigh heavily on their core business
  • Massive Valuation: Kellogg is relatively average when one looks at the company’s price to earnings ratio (16.20) and price to sale ratio (1.39); however, the price to book ratio (10.86) is massive when considering the company’s sluggish growth rate
  • Reliance on One Product: The company derives the wide majority of their revenue from a wide array of cereal brands, and even while these brands are different, they are all the same thing: cereal, and if cereal was to lose popularity, Kellogg would be in some deep trouble  

Opportunities:

  • Acquisitions: On June 1, Kellogg acquired the Pringles brand from Procter & Gamble, and further acquisitions in the future are a strong possibility and could help fuel Kellogg’s growth prospects
  • Product Innovation: Kellogg has for years innovated and created new brands and products, and further product innovation is probable and should fuel sales growth
  • Selling Brands For Cash: Just as Kellogg can purchase brands from other companies, other companies can purchase brands from Kellogg, which can help Kellogg raise cash to reinvest in their own company or to pay down their debt

Threats:

  • Rising Food Prices: This year's historic drought has already caused food prices to drastically rise, and further pain caused by this occurrence could leave Kellogg to face a decision where they either pass the extra costs on to their customers or swallow the pain in their margins
  • Competition: Fierce competition to offer the best product to the customer for the lowest price leads to margin contraction; and the food industry is one of the most crowded industries in the world
  • Shifts in the Market: When cereal was invented it was a revolutionary product that was interesting and new, and nothing is stopping another trailblazer from thinking up the breakfast of tomorrow

Competitors:

Major publicly-traded competitors of Kellogg include General Mills (NYSE: GIS) and Ralcorp Holdings (NYSE: RAH). General Mills is slightly larger than Kellogg and offers many products similar to those of Kellogg. General Mills also pays out a dividend yielding in the 3% range. Ralcorp also manufactures many products that are consumed for breakfast, and pays out no dividend.

The Foolish Bottom Line:

Kellogg possesses several strengths, weaknesses, opportunities, and threats; however, in the end it appears to be a financially stable company with a predictable future. Nothing is special about Kellogg ,but the company has a solid dividend and strong brand portfolio. For any long-term investor Kellogg is a great investment, but will not offer astonishing returns in the short-term. 


makinmoney2424 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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