Should I Buy Kellogg? 3 Pros, 3 Cons

by Tom Taulli | August 2, 2013 1:45 pm

Should I Buy Kellogg? 3 Pros, 3 Cons

Kellogg (K[1]) is all about steadiness, and this most recent quarter was no exception.

This Thursday, Kellogg announced that its revenues climbed by 3.3% to $3.71 billion and earnings improved about 9% to $352 million, or 96 cents per share. Adjusted earnings of $1 topped analyst expectations for 97 cents.

While K shares wavered a couple percentage points on the news, Kellogg’s stock gains have still been pretty even-keeled, up 16% vs. about 19% for the S&P 500.

So, should you buy Kellogg as it continues to keep pounding out solid numbers, or are there better opportunities elsewhere? To see, let’s look at the pros and cons:

Pros

Cereal Business: Kellogg — with brands like Corn Flakes and Special K — is the market leader, accounting for about 30% of the overall cereal biz. In general, the industry should benefit from the aging of the population considering that older people tend to eat more cereal (and generally are encouraged to for its health benefits). Plus, cereal is a very affordable food.

Snacks: For many years, Kellogg has had a foothold in the snacks business with items like Pop-Tarts and Cheez-Its, but the business got a huge boost last year when the company purchased Pringles from Procter & Gamble (PG[2]). The deal brought Kellogg a global platform of distribution, and so far, integration has gone nicely. And because P&G actually tended to neglect the business, Pringles could provide Kellogg with a nice pop (sorry) in long-term growth.

Innovation: This has been critical for keeping Kellogg’s brands relevant. Right now, the company is trying to reinvent some of its main categories, including the breakfast segment, where it hopes to introduce drinkable products for people with less time in the morning. This same “morning rush” has spawned products like Nutri-Grain breakfast biscuits. The company also has invested in healthier offerings, such as Raisin Bran Healthy Heart Omega-3, Special K Multigrain and Kashi GOLEAN Vanilla Graham Clusters. Also, its MorningStar Farms business gives it access to meat alternatives for vegetarians — certainly a big market opportunity.

Cons

Customer Dependence: Kellogg relies heavily on distribution from big-box retailers and grocers; about 20% of sales comes from Walmart (WMT[3]) alone. This puts the retailer at an advantage in terms of leverage to get better terms, which could put pressure on Kellogg’s margins. At the same time, the U.S. grocery market has been undergoing consolidation[4], which again will give the industry more negotiating power.

Commodities: Volatile prices have been an ongoing issue for Kellogg. The company buys heavy amounts of raw materials like corn, wheat, soy bean oil, sugar and cocoa; all these items can experience shortages, which juices Kellogg’s input costs … and while raising product prices is the typical response, it risks alienating consumers.

Competition: On the earnings call, Kellogg indicated that there was aggressive discounting in the cereal market from players like General Mills (GIS[5]). At the same time, the growth in Greek yogurt and smoothies have taken some market share.

Verdict

Even with the competition, Kellogg’s prospects look bright, at least for the long haul. The company’s brands resonate across the world, and the company continues to generate strong profits. Kellogg has also made smart investments in healthier foods, which should benefit from America’s growing health-consciousness, as well as the mega-trend of an aging U.S. population.

Meanwhile, Kellogg also sports a dividend that it has paid out since 1925 and that currently yields 2.7%.

So should you buy Kellogg? Yes — if you’re looking for a lower-risk option for your portfolio, the pros certainly outweigh the cons.

Tom Taulli runs the InvestorPlace blog IPO Playbook[6]. He is also the author of High-Profit IPO Strategies[7]All About Commodities[8] and All About Short Selling[9]. Follow him on Twitter at @ttaulli[10]. As of this writing, he did not hold a position in any of the aforementioned securities.

Endnotes:
  1. K: http://studio-5.financialcontent.com/investplace/quote?Symbol=K
  2. PG: http://studio-5.financialcontent.com/investplace/quote?Symbol=PG
  3. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT
  4. the U.S. grocery market has been undergoing consolidation: http://investorplace.com/2013/07/kroger-buys-harris-teeter-a-smart-move/
  5. GIS: http://studio-5.financialcontent.com/investplace/quote?Symbol=GIS
  6. IPO Playbook: http://investorplace.com/ipo-playbook/
  7. High-Profit IPO Strategies: http://goo.gl/TXQsz
  8. All About Commodities: http://goo.gl/FfP8R
  9. All About Short Selling: http://goo.gl/t5Jzb
  10. @ttaulli: https://twitter.com/ttaulli

Source URL: http://investorplace.com/2013/08/should-i-buys-share-of-kellogg-3-pros-3-cons/
Short URL: http://invstplc.com/1ny9Ncu