Shares of Kellogg (NYSE:K) haven’t been “Grrreat” for a long time, declining more than 13% over the last five years as demand for its core ready-to-eat cereal business has failed to “Snap, Crackle & Pop” as consumers increasingly ditch processed foods for products they consider to be “fresh and natural.” K stock now sits a couple of bucks above its 52-week low.
Nonetheless, there are reasons for investors to be optimistic about the Battle Creek, Mich.-based company.
Cereal Sales Less Soggy
For one thing, the six core cereal brands — Frosted Flakes, Froot Loops, Rice Krispies, Special K, Mini-Wheats and Raisin Bran — are holding their own in a declining market. According to Kellogg, the brands “collectively bounced back to share growth in 2018.” Its Kashi natural cereal brand, which has withered for years, also is on the rise. Bear Naked has become the country’s top granola brand, and Eggo frozen waffles also are rebounding.
“Consumers are rediscovering the benefits of cereal brands like Raisin Bran and Mini-Wheats,” said Kellogg CEO Steve Cahillane during the company’s latest earnings conference call in early February.”We’ve invested in and improved our innovation capabilities and pipeline, and in 2019 we have our strongest innovation pipeline in years, much of which hit the shelves in January and are off to strong starts.’’
Selling Crumbling Cookie Businesses
Deals Kellogg has made in recent years, including its $420 million purchase of a stake in Tolaram Africa Foods and its $600 million acquisition of protein bar maker RXBar, are starting to pay off. The company also is benefiting from the reorganization of its North American division and its increased investment in e-commerce. The food maker also aims to boost its business in Latin America, Asia, Africa and Europe.
Earlier this month, Kellogg announced plans to sell its cookie, fruit snacks, pie crust, and ice cream cones businesses to Italy’s Ferrero for $1.3 billion. It was a smart move given Keebler’s weak number-two position in cookies and number-three position in fruit snacks. Both businesses have performed poorly of late. Sales of Kellogg’s cookies, including Famous Amos, fell 5.4% in 2018 compared with 2017. The company’s fruit snacks fell 20.1% on a year-over-year basis.
The company is still keen on its snacks business thanks to brands like Cheez-Its, Pringles, Rice Krispy Treats and Pop-Tarts.
Shares of K stock have barely budged this year and Wall Street analysts aren’t optimistic that any rebound is near. The average price target on the stock is $59, about 3% higher than where it trades now. Kellogg stock guidance calls for 2019 sales to rise 3% to 4% and for organic growth to return. EPS will fall 5% to 7% for the year as it continues to increase spending to grow its business.
I recommend K stock for long-term investors because management is doing all the right things to reduce complexity, cut debt and position the company for future growth, which will come gradually. K’s dividend also yields a rate of 3.98%, well above the average for the S&P 500 index which is 1.86%.
As of this writing, the author did not own any shares of K stock.