Kellogg Company: A Slow Mover

The food giant has a reasonable valuation, but its growth prospects are limited

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Ishan Majumdar
Apr 19, 2021
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Kellogg Company (

K, Financial) witnessed a sour end to 2020 wherein both earnings and sales missed the analyst estimates in the fourth quarter.

Despite being a relatively slow growth story in 2020, Kellogg has been laying the foundation for the future by moving away from direct store distribution in favor of warehouse delivery and increasing investments in manufacturing capabilities. The company's e-commerce channels have delivered good results owing to the increase in online shopping in the pandemic.

The management believes that 2021 sales could grow around 2.5% after their continued efforts with respect to restructuring the product mix. Given this outlook, coupled with the continued slowness of away-from-home consumption, could the stock be a buy at current levels, or is it moving too slowly?

Recent financial performance

Unlike many food giants that made hay while the sun shone upon the essential goods sector in 2020, Kellogg had a mediocre year. In its most recent result as well, the company failed to match up to Wall Street expectations.

The company reported a top-line of $3.46 billion for the fourth quarter of 2020, which represented 7.48% growth as compared to the $3.22 billion in revenue reported in the corresponding quarter of 2019. However, this was below the analyst consensus estimate of $3.51 billion.

Revenues translated into a gross margin of 34.30% and an operating margin of 12.67%, which was higher than that in the same quarter of last year.

Kellogg's net income of $205 million resulted in adjusted earnings per share (EPS) of 85 cents, which was 3 cents below the average Wall Street expectations.

The silver lining of the result was that the company managed to generate $393 million in the form of operating cash flows and spent only $64 million in investing activities, leaving the management with a strong base of free cash flows to continue with the dividend yield of more than 3%.

Growth in e-commerce sales

The pandemic has altered the way consumers shop and the consumer goods industry has scrambled to meet the demands of e-commerce. Kellogg experienced its fair share of benefits from this pandemic-led traction that led to triple-digit growth in e-commerce sales in 2020.

It is worth noting that Kellogg had already made digital and e-commerce a major part of its growth strategy and didn't have to make any dramatic shifts in its operations. The company continues to strengthen its capabilities in the digital, e-commerce and data and analytics arena and remains on track to expand capacity in order to meet the future demand arising from new shop-from-home trends.

In addition to bringing in new specialists for this space, Kellogg is also training its other employees to be well-versed in the digital atmosphere. Moreover, the company's strong portfolio of brands, supply-chain investments and solid infrastructure bodes well for the top-line growth in the years ahead.

However, this is an area where almost every food company is in the process of building a strong infrastructure, which is why it cannot be considered a significant moat-builder in 2021.

Retail demand and product innovation

The packaged-food giant had been benefitting from increased demand for its products, particularly for its cereal and frozen food products. Kellogg did see its North American retail business have a very strong year with 5% net sales growth in 2020 driven by both volume and price mix contributions. This helped the company in setting off the slowdown in the foodservice sector and the away-from-home consumption, which is expected to be slow in 2021 as well.

Apart from this, the management continues to revamp its approach to innovation by launching the new Kellogg's Smorz Jumbo Snax, giving its customers diverse options to enjoy cereal beyond the bowl. In response to increasing consumer inclination towards healthy foods, Kellogg is offering a range of keto-friendly and plant-based protein foods. The fact that the company is keeping up with consumer trends is definitely a positive sign.

Final thoughts

Kellogg's stock took a beating from investors after a short-term spike in prices at the beginning of the pandemic, which is largely associated with the company's slow growth and supply constraints.

The company is expected to have a particularly slow 2021 as its struggles from the foodservice business and away-from-home consumption are expected to continue.

There is little doubt that the stock is reasonably valued given the enterprise-value-to-revenue multiple of 2.16 and a price-earnings ratio of 17.45. However, given the limited top-line growth prospects, I believe that there is no near-term catalyst that could really propel the stock, which is why I personally won't be investing in Kellogg.

Disclosure: No positions.

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I am a qualified Chartered Accountant with a Masters in Management (Grande Ecole) from HEC Paris. I run a proprietary boutique financial advisory firm called Baptista Research (www.baptistaresearch.com) specializing in M&A, corporate advisory, equity research and valuation of listed companies. I have nearly a decade of experience spread across investment banks, financial advisory firms, investment funds and other corporates in many different geographies, such as France, Spain, India and others. I was a part of the LBO Financing team at BNP Paribas where I worked on deals with a combined enterprise value of over $1 billion. I have also worked in mergers and acquisitions with Credit Agricole CIB and corporate strategy with Groupe Danone SA. Over the years, I have developed a strong specialization in corporate valuations, strategy and financial analysis.