About Kellogg
Storied, iconic and omnipresent are a few of the words that come to mind when looking at the brands under the Kellogg name.
Some of these brands include Apple Jacks, Cheez-It, Fruit Loops, Eggo, Frosted Mini-Wheats, Honey Smacks, Kashi, Corn Flakes, Frosted Flakes, Raisin Bran, Nutri-Grain, Pop-Tarts and Pringles.
Just to name a few.
If you’ve read some of our previous articles you know by now that we love companies with strong brand power. Specifically, we like companies that have recognizable marketing, well-received products and those that tend to have a front row seat on the shelves at both the local dollar stores and higher-end grocery stores and everywhere in between.
Although Battle Creek, Michigan-based Kellogg, a recognized food manufacturer and its various well-known subsidiaries tend to have a place on the shelf, does the company’s stock deserve to have a spot in your treasured investment portfolio?
Let’s get a little more familiar with the company’s financials and help you figure it out.
Kellogg’s stock financials
Kellogg’s (NYSE: K) stock price is currently trading at around $73, with a market capitalization of nearly $25 billion and a price-to-earnings (P/E) ratio of just above 16.
Nothing to dislike so far, as the company’s stock appears to be slightly undervalued according to its current P/E ratio that is four points below fair value (what the company’s stock is worth paying for today).
It should also be noted that this stock has a very low historical volatility according to its beta. In essence, beta simply measures how volatile a company’s stock price has been in the past, where a beta of 1 means a stock has tracked the movement of the S&P 500 and anything less than 1 implies that a stock has been less volatile than the market as a whole. Kellogg’s beta as of this publication is 0.4.
Digging deeper into the company’s financials, Kellogg’s management team oversees a balance sheet containing roughly $18.1 billion in total assets and nearly $14.5 billion in total liabilities.
We’re not too worried about Kellogg’s ability to manage and pay down its debt in the long run in large part due to their brand power and giant presence and reputation around the globe. We also find it encouraging that over the past five years, their total liabilities have remained around the same while their total assets, in that same time period have steadily grown from approximately $16.3 billion in 2017 to around $18.1 billion in 2022.
This tells us that Kellogg could be growing its product lines, manufacturing plants or other assets vital to the company’s operations without incurring overwhelming amounts of debt. So far, it seems that Kellogg is good at debt management and deploying its capital.
Additionally, the company’s total revenue according to the income statement has slowly but steadily risen from around $12.8 billion in 2017, increasing each year to roughly $14.1 billion in 2022.
The company’s increase in total revenue was slightly more prominent between 2021 and 2022 which can almost definitely be attributed to price hikes in their products paired with an increase in demand for storable food as pandemic concerns ran rampant and still remain.
Finally, as it relates to the big three financial statements, the company’s net income according to the cash flow statement has been quite solid in recent years, only dipping down to $977 million in 2019 which was likely due to increased costs they needed to cover or the company’s reinvesting in their core brands or other shareholder beneficial investment-related activities.
Kellogg does a nice job realizing a profit as well.
So much so that the company’s trailing twelve month (TTM) gross, operating and net profit margins are all notably higher than that of the industry average. Specifically, their annual net profit margin is about 10% higher than the industry even though they operate in a very competitive space.
For instance, one of their main competitors, General Mills, is home to Bisquick, Cheerios, Chex, Cocoa Puffs, Cinnamon Toast Crunch and other tasty brands according to their website.
However, General Mills is not Kellogg’s only competition.
Some of Kellogg’s other formidable competitors include Kraft Heinz, Mondelez International, Pepsico and J M Smucker.
Suffice it to say, if Kellogg can churn out a 10% higher profit than the industry average, they’re doing incredibly well from a strict financial standpoint.
The dividend lovers of the world will also likely enjoy the fact that Kellogg currently pays out an annual dividend of $2.32, which is slightly higher than General Mills’ annual dividend of $2.04.
To be fair, Kellogg doesn’t do the best job at achieving annual returns on their equity, assets and investment(s); they do a fantastic job.
Specifically, their annual return on equity is over double than that of the industry, their annual return on assets is over 2% higher and their annual return on investment sits at around 4% above the competition.
Risks with Kellogg’s stock
This is one of the most financially strong companies our team has analyzed so far.
However, one thing that should be on investor’s minds, especially when it comes to retail and labor-intensive businesses and industries is the ever looming threat of strikes.
From a pure, objective investment standpoint strikes hardly ever work in the favor of investors or company shareholders, especially in the short term. They tend to introduce a threat of decreased production, less overall efficiency and the company paying employees more, ultimately impacting the company’s long-term financials.
Irrespective of how one views unions or striking, it poses a threat to some of the previously mentioned numbers.
Kellogg’s executive team has seen recent (2021) pressure involving employees at their cereal plants across the country.
The strike allegedly stemmed from disagreements in the new labor contract between the union and Kellogg.
Subsequently, as tensions continued to grow and more press began to surround Kellogg and the situation, the company made a decision to permanently replace their striking workers, which garnered national attention even from President Biden.
Ultimately, the contract was ratified and a deal was struck between the company and its employees.
It’s encouraging that a deal was made and the company was able to move on with production as usual, thus we aren’t terribly worried about future strikes at Kellogg.
If they can get through these kinds of pressures in the past, there isn’t likely much in the way of preventing them in the future.
Should you buy Kellogg stock?
Brand power and bran power.
Outside of the company having some strong name recognition, it leads a very competitive space and a space that is fairly recession proof. No matter the state of the economy, people who habitually eat cereal for breakfast are likely to continue eating cereal even if the market crashes.
Kellogg is also financially strong and has triumphed against macroeconomic and company-specific threats.
Given all of this information, we give the company a “buy” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.