Is This Company Still Tasty?

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

Kellogg has recently held its analyst day, in which it presented figures of an EPS growth of 5%-7% for FY13 against the consensus estimates of ~9%. However, based on its strong fundamentals, I feel the company should keep on growing in the long run. Kellogg has significantly higher quarterly revenue growth of 12% against its competitor General Mills, which showed a lesser revenue growth of only 5%, while Ralcorp Holdings has a reasonable revenue growth of 11%.

Another parameter which puts Kellogg ahead of its peer group companies is, its gross margin of 40% in the last 12 months, while General Mills has a margin of 37% and Ralcorp Holdings has a significantly lower margin of only 20%.

<table> <tbody> <tr> <td> <p><span>Company Name</span></p> </td> <td> <p><span>Qtrly Rev Growth (yoy)</span></p> </td> <td> <p><span>Gross Margin (last 12 months)</span></p> </td> </tr> <tr> <td> <p><span>Kellogg <span class="ticker" data-id="204153">(NYSE: <a href="">K</a>)</span></span></p> </td> <td> <p><span>12%</span></p> </td> <td> <p><span>40%</span></p> </td> </tr> <tr> <td> <p><span>General Mills <span class="ticker" data-id="203742">(NYSE: <a href="">GIS</a>)</span></span></p> </td> <td> <p><span>5%</span></p> </td> <td> <p><span>37%</span></p> </td> </tr> <tr> <td> <p><span>Ralcorp Holdings <span class="ticker" data-id="205181">(NYSE: <a href="">RAH</a>)</span></span></p> </td> <td> <p><span>11%</span></p> </td> <td> <p><span>20%</span></p> </td> </tr> </tbody> </table>

In the 3Q12, the company reported an EPS of $0.82 beating the consensus estimate of $0.80, in spite of its voluntary recall of Frosted Mini-Wheat, which dragged the EPS lower by $0.06. With its strong focus on product innovation, growing market reach combined with acquisition/joint venture and sheer absence of any recall related cost, I don’t think it will be difficult for Kellogg to accelerate its margin-growth in the upcoming time. Let’s have a quick overview of its growth drivers.

Pringles Growth:

Kellogg’s acquisition of ‘Pringles’ has increased its international snacks business by almost 2 times. This will help the company to increase its presence in the US, Latin America and Asia-Pacific regions.  Pringles has also shown an impressive double digit sales growth in the last quarter, and held ~11% of the market share in the US potato chips market in September, which is the highest for Pringles since 2009. This was partly helped by its cross promotional activities like joint in-store display with ‘Keeber’ and ‘Special K’. I feel the company will continue to generate higher growth based on the synergies generated through this acquisition.

JV with Wilmer in China:

Kellogg’s announcement of a JV with Wilmar International in China in late September will benefit the company to gain in the Chinese market.  Under this JV, Wilmar will manufacture and distribute cereal & snacks under the Kellogg and Pringles brand. The Chinese snack market is expected to be $12B by the end of this year, with a growth rate of more than 10%. This JV provides Kellogg an immediate access to the well-established sales and distribution channel in ~3000 cities in this high growth market. 

New Launches:

Kellogg’s focus on continuous innovation and launching of new products should give it an upper hand in the coming time. In 3Q12, almost 50% of sales in cereals came from its new products. Additionally, the company also has a strong product pipeline for 2013 including Special K Chocolate Strawberry, Cinnamon Jacks, Mini-Wheat, Crunch, Kashi Berry, Fruitful, etc. As the US market is improving continuously, these new products will help the company to increase its revenue.

Along with it, Kellogg is expected to have free cash flow of ~$1B for FY12’, this should result in incremental dividends (currently the company has a good dividend yield of ~3%).  Also, the company still has to spend ~$600M out of its share repurchase authorization of $2.5B announced in April 2010, thus providing good support to its share price. Combining its growth prospects and its strong balance sheet, I think the company is best placed for a good long term growth, even though its forward P/E of 14.87 may look expensive to some investors.  I would rate this stock a buy.


ShwetaDubey 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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