This Buy-Rated Stock Announces Spin-Off Plan

The cereal and snack maker Kellogg’s (K) intention to separate its business into three independent companies through a tax-free spinoff has attracted investors’ attention. As the company embarks on its journey to transform its portfolio and enhance performance, it is well-positioned to benefit significantly. Let’s discuss...

Cereal and convenience food producer Kellogg Company (K) recently announced its plan to spin off its cereal and plant-based foods businesses into three independent companies that will focus on the cereal business, global snacking, and plant-based protein products.

The cereal conglomerate believes that the split could develop a greater strategic focus for each business and help build on the company’s current momentum.

Investor excitement stemming from the company’s portfolio transformation announcement has helped its stock gain 7.6% year-to-date. The stock is trading just 6.4% below its 52-week high of $75.56.

According to K’s CEO, Steve Cahillane, the snack-focused business will be looking to add to its portfolio through acquisitions. This should allow the food maker to create more long-term value for its shareholders and position the company for new growth opportunities. As it bounces back from supply chain disruptions, the spinoff could help regain its market share and improve profit margins significantly.

Here’s what could shape K’s performance in the near term:

Consumer Staples Could Gain Traction in a Volatile Market

In turbulent markets, shares of consumer staples companies work as a safe haven for investors. Since these non-cyclical stocks are always in demand regardless of the economic uncertainty and market turmoil, investors are more likely to favor them.

Consumer staples giant K gained 0.38% over the past month even as the S&P 500 sank 1.7% and Dow Jones Industrial Average (DJIA) fell 1.9%. With consumers continuing to buy essential products as they cut back their budget on discretionary purchases, the consumer staples stocks like K should see stable earnings flow.

Solid Growth Story

The consensus EPS estimate of $4.3 for fiscal 2023 indicates a 4.6% improvement year-over-year. Moreover, its EPS is expected to rise 2.4% over the next five years. K has an impressive earnings history as it beat the consensus EPS estimates in each of the trailing four quarters. Analysts expect K’s revenue to rise 2.8% year-over-year to $14.58 billion in fiscal 2022.

K’s EPS has increased at a CAGR of 9.9% over the past three years. Also, its net income has grown at a CAGR of 9.5% over the same period.

Impressive Top and Bottom Line Growth

K’s organic net sales increased 4.2% year-over-year to $3.73 billion in the first quarter ended April 2, 2022. Its reported net sales from Latin America grew 8%, mainly due to price/mix growth, which more than offset the decline in volume. The company’s reported operating profit rose 9.5% year-over-year to $517 million.

Also, its EPS increased 15% from the prior-year period to $1.23, while its net cash provided by operating activities grew 39.1% from the year-ago value to $327 million.

The company’s trailing-12-month EBIT margin of 14.5% is 70.5% higher than the industry average of 8.5%. Also, its trailing-12-month ROE of 44.5% is 264.6% higher than the industry average of 12.2%. 

POWR Ratings Reflect Promising Outlook

K's overall B rating translates to Buy in our POWR Ratings system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. K has a B grade for Stability, consistent with its relatively lower beta of 0.48.

Also, in terms of Quality grade, K has a B. The stock’s higher-than-industry ROE is in sync with this grade.

Click here to see the additional POWR Ratings for K (Value, Stability, Sentiment, and Momentum).

The stock is ranked #24 of 88 stocks in the Food Makers industry.

Bottom Line

K’s strategic initiatives to reshape its portfolio by spinning off its U.S., Canadian, and Caribbean businesses and expanding into new markets uniquely positions it to capitalize on strong long-term category prospects.

In addition, as the market continues to favor consumer staples stocks amid inflation woes, the cereal conglomerate is poised to gain. Therefore, we think this is an opportune time to scoop up its shares.

How Does Kellogg Company (K) Stack Up Against its Peers?

K has an overall B rating in our proprietary rating system. Check out these other stocks within the Food Makers industry with A (Strong Buy) ratings: Sanderson Farms, Inc. (SAFM), JBS S.A. (JBSAY), and Industrias Bachoco, S.A.B. de C.V. (IBA).

K shares were trading at $71.01 per share on Monday afternoon, up $0.29 (+0.41%). Year-to-date, K has gained 12.14%, versus a -17.39% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.


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