Kellogg just reported stronger results than expected and predicted better sales growth, but the news wasn't the reason one analyst is now less downbeat.
Kellogg's (ticker: K) second-quarter results came in above the Wall Street consensus Thursday, and the packaged-food maker raised its forecast for full-year organic sales growth, a key metric for staples stocks. Piper Sandler analyst Michael Lavery upgraded Kellogg to Neutral from Underweight, not because of the quarter, but because of his latest math about the company's planned split into three.
Lavery raised his target for the stock price by $10 to $74, where the shares were trading before the open, after a gain of 0.2%. That $74 is also the fair value estimates he reaches with a new sum-of-the-parts analysis of the company.
Recall that in June, Kellogg said it would become three separate companies , focusing on its cereal, global snacking, and plant-based protein businesses. Barron's noted that there were a lot of unknowns about the deal—a point Lavery echoes—and reason for caution, but that the shares still looked relatively cheap for investors scrambling for a haven. The stock is up about 9% since that article's publication.
Lavery is still concerned about Kellogg's core business, particularly as cereal may be vulnerable to consumers trading down to cheaper brands in response to high inflation. Moreover, he said, he had to make plenty of assumptions with his new model, including so-called dis-synergies—the costs of untangling the businesses from one another—that could be as high as 2% of sales. He warned that market conditions still aren't back to normal following the pandemic: Sales of snacks have increased as prices have risen, but he questioned whether that will last.
That means that his estimates will likely change as more data become available, but for now, he expects a new North American cereal company to fetch the lowest valuation, at 9 to 11 times the per share earnings expected for 2023, followed by global snacking, at 13 to 15 times, and a valuation of 20 to 30 times for the plant-based protein company. He expects the latter will see the highest revenue growth, at 10% in 2024, followed by a 6% rise for global snacking that year, and a 1.5% decline for cereal.
With the shares trading where he thinks they should at this point, he doesn't see a case for a big slide in the stock. He rates it at Neutral, given that he thinks gains in the stock may now be limited.
Lavery's upgrade means there are now four bearish analysts on the Street, as tracked by FactSet, compared with three who are bullish. The rest are sidelined, rating the stock at Neutral or the equivalent, with an average price target hovering just under $74.
Kellogg is up more than 14% this year, nearly as much as the S&P 500 has fallen.