With shares of Kellogg Company (NYSE:K) trading at around $63.66, is K an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let's analyze the stock with the relevant sections of our CHEAT SHEET investing framework:
C = Catalyst for the Stock's Movement
Credit Suisse analyst Robert Moskow recently reiterated an Underperform rating on Kellogg, but raised his price target to $62 from $57. He stated, "Kellogg adjusted 1Q EPS of $0.99 missed consensus of $1.02, and management lowered expectations for second quarter, implying a very back-half loaded year. As we expressed in our January 28 report, there seems to be a disconnect between the market view that the 5-7 percent EPS growth guidance for 2013 is highly conservative, and the management view that it has guided 'responsibly’ for a 'normal year.’ We think that FY13 guidance is achievable, but not very beatable given the lack of excitement on the top-line and the uncertainty as to whether commodity deflation can drop to the bottom line. Fourth quarter looks particularly aggressive given that it may now imply as much as 40 percent EPS growth."
Jeffries analyst Thilo Wrede recently reiterated a Hold rating on Kellogg and raised his price target to $68 from $60. He stated, "K’s 1Q13 adj. EPS of $0.99 missed expectations as the co. was dealing with inflation and, in our view, lower than expected sales. However, as inflation is abating and cost savings are ramping up, mgmt expects performance to improve over the course of the year. Nevertheless, results might still come under pressure because of the limited benefit of share repurchases due to the recent run up in share prices. Reit. Hold with new $68 PT."
Kellogg has a strong brand portfolio, and the stock has shown decent resiliency in weak markets. It held up better than most stocks in 2008/early 2009, but it didn't hold up as well as General Mills (NYSE:GIS).
Current negatives for Kellogg include margin contractions, cost inflation, fierce competition, poor debt management, and lackluster innovation.
Now let's take a look at some numbers. The chart below compares fundamentals for Kellogg, General Mills, and ConAgra Foods (NYSE:CAG). Kellogg has a market cap of $22.99 billion, General Mills has a market cap of $32.66 million, and ConAgra has a market cap of $14.88 billion.
| K | GIS | CAG | |
| Trailing P/E | 23.79 | 18.56 | 29.85 |
| Forward P/E | 15.23 | 17.30 | 14.34 |
| Profit Margin | 6.77% | 10.41% | 3.48% |
| ROE | 44.93% | 22.14% | 9.87% |
| Operating Cash Flow | $1.76 Billion | $2.89 Billion | $1.05 Billion |
| Dividend Yield | 2.70% | 3.00% | 2.80% |
| Short Position | 1.90% | 1.50% | 1.50% |
Let's take a look at some more important numbers prior to forming an opinion on this stock.
E = Equity to Debt Ratio Is Weak
The debt-to-equity ratio for Kellogg is weak, and this is a major concern. If and when interest rates increase, Kellogg could find itself in a challenging situation. General Mills is much better situation in this regard.
| Debt-To-Equity | Cash | Long-Term Debt | |
| K | 3.17 | $281.00 Million | $7.90 Billion |
| GIS | 0.95 | $751.20 Million | $8.06 Billion |
| CAG | 2.07 | $723.80 Million | $10.68 Billion |
T = Technicals Are Strong
Despite a weak performance over the past month, Kellogg has been a steady performer. However, it has underperformed its peers for every time frame listed below.
| 1 Month | Year-To-Date | 1 Year | 3 Year | |
| K | -0.55% | 14.82% | 30.49% | 29.40% |
| GIS | 4.17% | 27.35% | 36.59% | 55.62% |
| CAG | 3.70% | 22.68% | 41.98% | 60.97% |
At $63.66, Kellogg is trading above all its averages.
| 50-Day SMA | 63.29 |
| 100-Day SMA | 60.48 |
| 200-Day SMA | 56.09 |
E = Earnings Have Been Steady
Earnings have been steady without being overly impressive on an annual basis. Revenue has been impressive over the past two years.
| 2008 | 2009 | 2010 | 2011 | 2012 | |
| Revenue ($)in billions | 12.82 | 12.58 | 12.40 | 13.20 | 14.20 |
| Diluted EPS ($) | 2.99 | 3.16 | 3.40 | 2.38 | 2.67 |
| 3/2012 | 6/2012 | 9/2012 | 12/2012 | 3/2013 | |
| Revenue ($)in billions | 3.44 | 3.47 | 3.72 | 3.56 | 3.86 |
| Diluted EPS ($) | 1.00 | 0.84 | 0.82 | 0.02 | 0.85 |
Now let's take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?
T = Trends Might Support the Industry
This is a defensive industry, but only Kraft Foods Group (NASDAQ:KRFT) has beaten estimates as of late. Overall, people need to eat. Therefore, the industry should be fine. On the other hand, many stores are now offering more generic brands. If the consumer weakens, then they might opt for cheaper alternatives.
Conclusion
Kellogg is a quality company with many superb brands to its name, but the stock's momentum is beginning to fade and debt management has been subpar. Innovation would have the potential to lead to increased revenue, which could then help pay off debt. However, the innovation isn't there. Kellogg does offer a generous 2.70 percent yield, but it's not as generous as the 3.00 yield offered by General Mills. General Mills has also performed better over the past three years, and it has better debt management, which will likely mean more resiliency in a weak market.
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