In its latest quarterly report, Kellogg (NYSE:K) showed some hopeful signs: revenue increased by 11% to $3.39 billion, with profit up 14% to $343 million. Of course, last year’s numbers were pretty weak.
Meanwhile, investors have been mostly upbeat on Kellogg’s shares – they’re up 10% so far this year.
Can we expect the steady returns to continue? Let’s take a look at the pros and cons:
Pros
Great portfolio. Kellogg has franchise brands like Corn Flakes, Keebler, Eggo and Rice Krispies. The company also has next-generation brands that focus on healthier offerings, such as Morningstar Farms, Nutri-Grain and Kashi.
At the same time, Kellogg has distribution in more than 180 countries. As for the U.S., the company has a sophisticated direct store-door delivery system, which allows for better response times to customer demand.
Digital marketing. Kellogg has been at the forefront of this. For example, its Pop-Tarts Facebook page has 3.3 million “likes.” Or look at the Cheez-It brand — it was able to get nearly 30 million online votes for its “Choose Your Flavor” campaign.
Online marketing is a great way to engage with customers and build loyalty. It’s also cheaper than a 30-second commercial for broadcast television.
Investing for the future. After lagging for a couple years, Kellogg has been ramping up its product innovation. The company has interesting offerings like Special-K Cracker Chips, Rice Krispies Gluten-Free cereal and Thick & Fluffy Eggo waffles.
Cons
Supply chain problems. About a year ago, Kellogg had to recall cereals because of a foul odor. It was a serious problem, which pointed to weaknesses in the supply chain. As a result, the company has increased the number of auditors and has also terminated vendors.
Macro pressures. No doubt, inflation has become a big problem for consumer products companies. Unfortunately, Kellogg believes that rising costs will continue for the long haul, due in large part to rising grain consumption across the world. Another big factor is that there is little arable land for farming.
Debt. Kellogg’s is quite large, coming to $5.3 billion. This compares to equity of only $2.4 billion. Kellogg does have strong cash flows, but its debt load could make it tougher to capitalize on acquisitions.
Verdict
Kellogg is still in the transition phase, which will likely take another year. Unfortunately, the company is currently contending with the challenges of a slow economy, commodity inflation and intense competition. In addition, Kellogg hasn’t been very aggressive with cutting costs.
Moreover, Kellogg’s shares are not necessarily cheap, coming to about 17 times earnings. For investors, the cons outweigh the pros on the stock for now.
Tom Taulli’s latest book is “All About Short Selling” and he has an upcoming book called “All About Commodities.” You can find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.
