Kellogg is stuck in a box

While the cereal and snack food stock does offer a strong yield at 2.9%, I still consider this a stale pick.

By Staff Dec 2, 2013 4:26PM

Caption: Kellogg's office building
Credit: © Helen Sessions/AlamyBy Richard logo

NEW YORK (TheStreet) -- Shares of cereal and snack food giant Kellogg (K) have been stuck in range since the first of April.

While investors are understandably disappointed, that the stock has posted any year-to-date gains at all should qualify as a win given the company's recent quarterly results.

While Kellogg still has dominant positions on the cereal and snack food shelves, the company has struggled to please the Street with organic growth. I won't go so far as to proclaim that General Mills (GIS) and Post (POST) have become better investments. But on a relative basis, it's hard to dispute their respective results. Following yet another disappointing quarter, Kellogg shares may be stale for the foreseeable future.

With third-quarter revenue down 0.1% year-over-year, there's no question that Kellogg is still dealing with weak volumes. This was enough for an "in line" performance, given that these shares are trading at a P/E close to 24, though the Street is still pricing Kellogg stock on the assumption that there will be a second-half rebound in volumes. I'm not as optimistic, given that organic revenue increased by less-than 1%.

If you've been following this sector for a while, there is nothing that analysts love to scrutinize more than "organic growth," which measures a company's operational performance using only internal resources and excluding events like acquisitions.

To be fair, Kellogg is not alone in this situation. As with ConAgra Foods (CAG) and Campbell Soup Company (CPB), which have grown solely through acquisitions, Kellogg's management, which has acquired strong brands like Keebler and Pringles, hasn't been shy about doing deals to boost the top-line. Still, as noted, the stock has barely moved in eight months, and investors have been disappointed with the "soggy" results.

With Kellogg's rich history, management deserves the benefit of the doubt. The thing is, with revenue in North America declining by 1.3% to $2.4 billion, not to mention 2.2% decline in cereals, there are no "quick fixes" to address these underlying struggles. And I believe we've reached a point where we can safely say that, despite management's innovative efforts, the company is beginning to lose share in some key markets.

We know Kellogg's market share in the cereal business is under attack. After all, General Mills has been anything but conservative in its ad spending, particularly in the last couple of quarters. Unfortunately, Kellogg's responses intended to secure its position, including things like new breakfast shakes, have proven ineffective.

Equally worrisome is the impact that rivals like Mondelez (MDLZ) and PepsiCo (PEP) have had on Kellogg's snack food business. Although the company has come with several new crackers and chips, these products -- as creative as they may have been -- have done little to spur Kellogg's organic growth. And these failures serve as reminders to the Street of how expensive the $2.7 billion all-cash acquisition of Pringles was for Kellogg.

This deal may yet prove worthwhile. But it's now been more than a year with consistent unimpressive outcomes. The good news is that, even with these struggles, Kellogg is still a highly profitable operation, which is still strong in specialty sales. Unfortunately, that's just not the company's "milk to its cereal." Although specialty revenue advanced more than 6%, the overall segment weakness remained glaring.

There's something to be said, however, with Kellogg's shares being stuck in this tight trading range. What this means is that even with the company's lowered full-year guidance, the Street still believes in management's strategies to turn things around, including plans to slash 7% of its workforce by 2017.

To that end, given management's projected cash savings of close to $500 million by 2018 (which should overlap costs tied to the Pringles deal that should by then have gone away), investing in Kellogg here is still about the future. But while Kellogg does offer a strong yield at 2.90%, which should reward me for my patience, I still consider this a stale stock and also expensive relative to the revenue growth rates of Nestle (NSRGY) and General Mills.

At the time of publication, the author held no position in any of the stocks mentioned.

More from

Dec 2, 2013 5:06PM
1. Doing mass layoffs to make themselves look profitable.
2. Products are all made from GMOs
3. Fought against GMO labeling initiatives (not only does Kellogg use GMOs, but they don't want consumers to know what's in their food)

Consumers can make or break a brand. Wake up John Bryant.

Dec 2, 2013 6:46PM

Obamaville will bail out Kellogg - it's another Michigan company that's too big to fail.

Dec 2, 2013 5:43PM
Dec 3, 2013 9:24AM

Make sure and take off your shoes and socks...Geezer,

So you can get a good count on all those lies...moron.

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