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Msg  33 of 37  at  6/25/2022 10:36:30 AM  by

jerrykrause


Kellogg Stock Could Be Grrrreat Again, but It Will Take Time

Kellogg Stock Could Be Grrrreat Again, but It Will Take Time
 

Kellogg needs a new company name that evokes snacking and overseas growth, not Americans slurping down Frosted Flakes. Something subtle. Is ¡Munch-ivërsal! taken?

See, the company said this past week that it will split into three parts by the end of next year: Global Snacking Co, North American Cereal Co, and Plant Co. Don't worry: Those names are only placeholders, and the plant one will sell veggie burgers, not geraniums.

In other words, Kellogg (ticker: K) wants to pull a Mondelez International (MDLZ). A decade ago, Kraft ditched the cheese, hot dogs, and other sleepy stuff into a spinoff called Kraft Foods , but kept the snacks, including Oreos and Ritz crackers, and held a naming contest. The winner, "Mondelez," is meant to sound a bit like romance-language words for "world" and "delicious." Some subtlety lover added "International" to the end, and voilà.

There is seemingly endless worldwide demand for cookies, chips, and chocolates, so Mondelez trades at 21 times earnings. The company said this past week that it will buy Clif Bar. PepsiCo (PEP) goes for 25 times earnings, and it isn't because of soda. Think Doritos, Cheetos, and Sun Chips. Pepsi's Frito-Lay division is expected to increase North American sales by a double-digit percentage this year.

And there sits Kellogg, at less than 17 times earnings. Food is defensive, so now should be its time to shine. And the company is packed with snacks, including Pringles, Pop-Tarts, Cheez-It, and Town House Crackers. Revenue from the coming cereal and plant spinoffs make up less than 20% of the company total.

But the best case for what the name evokes is still cereal. Another possibility is the 1994 film The Road to Wellville, wherein Anthony Hopkins plays Dr. John Harvey Kellogg, vegetarian and superintendent of the Battle Creek Sanitarium health resort, who goes into no small amount of detail about achieving healthy gastrointestinal throughput.

The sanitarium really did develop a recipe for flaked corn, and Dr. Kellogg's brother, Will Keith "W.K." Kellogg, parlayed its success into the Battle Creek Toasted Corn Flake Company, known today as The Kellogg Company.

The split-up should fix the company's cornflakes image. So why did the stock rise just 2% on the news? "It's still unclear whether or not there's real value creation," says Bryan Spillane, a food and beverage analyst at BofA Securities.

One problem is that eight years ago, Kellogg entered into an efficiency drive called Project K, which involved consolidating facilities and business functions across departments. So the pending split looks a little like Project Reverse-K, and the result could be higher costs. Another problem is that Kellogg is restructuring to highlight its revenue growth in snacks at a time when interest rates are rising, growth stocks are underperforming, and investors seem keener on cash flows than revenue gains.

So it's unclear whether this corporate snacktivism will pay off for investors, and it could be two years before we learn, and we don't even have a name. Wait: PringleTarts International. You're welcome, Kellogg.

Spillane at BofA says that investors should favor food stocks with strong cash flows, plenty of pricing power, and products that hold up well when the economy slows. For snacks, he likes Mondelez and Hershey (HSY), which has seen strong momentum with its Reese's, Kisses, and Twizzlers brands. He also likes Lamb Weston Holdings (LW), which specializes in french fries. Last year's potato crop was the worst in decades, which hurt fry production, but this year looks better. And finally, there's Kraft Heinz (KHC).

Remember how Kraft changed its name to Mondelez and put its cheese in a new company called Kraft? Well, that Kraft merged with Heinz in 2015. Warren Buffett and Brazil's 3G Capital were investors, and it was an epic flop. There was too much emphasis on cost-cutting and not enough on product innovation. Sales, profits, and the stock price slid.

So the company got rid of—you guessed it—the cheese again. Also, nuts. And management. Now things are looking up.

Spillane also shared two pans. Campbell Soup (CPB) got a lift from lockdowns, but now might give some of it back. And McCormick (MKC) trades at 27 times earnings at a time when beef prices are flying. Any pullback on protein could mean less need for seasonings and rubs.

Stocks rallied this past week. Why? Inflation is so high that the Federal Reserve must raise interest rates to stifling levels, so we'll definitely get a recession. And that makes falling inflation inevitable, which means the Fed doesn't have to be quite so aggressive, so we definitely won't get a recession. Where things get interesting is...what was the question again?

I asked Michael Mullaney what he makes of it. He's the director of global markets research at Boston Partners, which manages close to $100 billion. He says the pace at which the Fed plans to bring down inflation has been accomplished twice before, in the mid-1970s and early 1980s, and it caused a recession both times. "My gut feel is that they may balk on their targets a little bit," he says. "They may go to something like, 'We've made substantial progress, and there are now still structural issues that we don't have control over.' "

If that happens, we might dodge a recession at the cost of still-pesky inflation. But Mullaney says that bonds look more appealing for the first time in years, and that some growth stocks have fallen to value levels. At the same time, marketwide earnings estimates look likely to fall. "It's going to be a mundane time period for all investors, unless you're a superior stock picker," he says.

I was shooting for meh, so mundane feels like upside.

 


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