Kellogg Stock And Its Potential Gains (NYSE:K) (2024)

Kellogg (NYSE:K) share price has increased by 6.4% in the last month, outperforming the S&P 500. This boom in short-term growth is due mainly to its 2021 forecast. When viewing the company's long-term potential, its industry has had solid growth. The packaging industry has experienced a 30.5% five-year growth at the end of 2020, from $589.9 billion to $770.5 billion. While this growth is a positive factor, Kellogg still has $7.47 billion in total debt, $6.75 billion long term and $729 million short term, as of Feb. 22. As a result, about a dozen Wall Street analysts have set a $66.09 price target for K, an increase over its current price of $60.63 on March 18.

When considering these current stories about Kellogg Company, we need to determine which news topics will have a long-term and ongoing effect on the company and its share price. Certainly, the company's heavy long-term debt will be a factor for the foreseeable future. As we highlight below, the poor current ratio and debt/equity ratio are essential factors that need to change for the company to improve.

While current news stories, good or bad can sway our opinion about investing in a company, it's good to analyze the fundamentals of the company and to see where it's been in the past and in which direction it's heading.

This article will focus on the long-term fundamentals of the company, which tend to give us a better picture of the company as a viable investment. I also analyze the value of the company vs. the price and help you to determine if Kellogg is currently trading at a bargain price. I provide various situations which help estimate the company's future returns. In closing, I will tell you my personal opinion about whether I'm interested in taking a position in this company and why.

Snapshot of the Company

A fast way for me to get an overall understanding of the condition of the business is to use the BTMA Stock Analyzer's company rating score. It shows a score of around 75/100. Therefore, Kellogg is considered to be a good company to invest in, since 70 is the lowest good company score. Kellogg has high scores for 10 year Upward Price, ROE, Ability to Recover from a Market Crash, GMP. It has mediocre scores for EPS, ROIC. It has a low score for PEG Ratio. A low PEG Ratio score indicates that the company may not be experiencing high growth consistently over the past five years. In summary, these findings show us that Kellogg seems to have above average fundamentals since the majority of categories produce good scores.

Before jumping to conclusions, we'll have to look closer into individual categories to see what's going on.

(Source: BTMA Stock Analyzer)

Fundamentals

Let's examine the price per share history first. In the chart below, we can see that the price per share has increased from 2012-2016. However, Kellogg Company's price per share has mostly been on a decline since 2016 until present. Overall, share price average has grown by about 14.35% over the past 10 years or a Compound Annual Growth Rate of 1.5%. This is a poor return.

(Source: BTMA Stock Analyzer - Price Per Share History)

Earnings

Looking closer at earnings history, we see that earnings haven't grown consistently over the past 10 years. There has been much volatility with years of great growth followed by large declines. The year-to-year earnings variations make me wonder if the changes in commodity prices of cereal and grain help to cause this increased volatility.

Consistent earnings make it easier to accurately estimate the future growth and value of the company. So, in this regard, Kellogg does not have the best qualities to accurately estimate future growth or current value.

(Source: BTMA Stock Analyzer - EPS History)

Since earnings and price per share don't always give the whole picture, it's good to look at other factors like the return on equity, return on invested capital, and gross margins.

Return on Equity

Overall, the five-year ROE has stayed at impressive levels. However, two things to mention are the volatility of the ROE and dramatic changes of ROE from one year to the next. As long as the ROE stays at sufficient levels, I'm not as worried about the volatility, but it's still something to keep in mind. This volatility indicates that Kellogg might not be the most stable stock. Five-year average ROE is solid at around 46%. For return on equity (ROE) I look for a five-year average of 16% or more. So, Kellogg easily meets my requirements.

(Source: BTMA Stock Analyzer - ROE History)

Let's compare the ROE of this company to its industry. The average ROE of 26 Packaging companies is 9.76%.

Therefore, Kellogg Company's five-year average of 46% and current ROE of 42.7% are well above average.

Return on Invested Capital

The ROIC chart shows volatility like the ROE chart. In addition, the ROIC is problematic because levels are too low to offset the volatility. Five-year average ROIC is below average at around 12%. For return on invested capital - ROIC, I also look for a five-year average of 16% or more. So, Kellogg does not pass by my standards.

(Source: BTMA Stock Analyzer - Return on Invested Capital History)

Gross Margin Percent

The Gross Margin Percent has declined overall during the past five years. The good news is that the levels have been high enough, but I'm cautious about companies which can't maintain their margins.

Five-year GMP is above average at around 35%. I typically look for companies with gross margin percent consistently above 30%. So, Kellogg still has acceptable margin levels, but I would watch to see if these levels continue to decline in the coming years.

(Source: BTMA Stock Analyzer - Gross Margin Percent History)

Looking at other fundamentals involving the balance sheet, we can see that the debt-to-equity is more than 1. This tells us that the company owes more than it owns.

Kellogg's current ratio of .66 is unsatisfactory, indicating that it doesn't have an adequate ability to use its assets to pay its short-term debt.

Ideally, we'd want to see a current ratio of more than 1, so Kellogg does not meet this amount.

According to the balance sheet, the company is below average with regard to its financial health. In the long term, the company does not have a strong debt-to-equity. In the short term, the company's financial situation also could use improvement.

The Price-Earnings Ratio of 16.3 indicates that Kellogg is selling at a slightly above average price when comparing Kellogg's P/E Ratio to a long-term market average P/E Ratio of 15. The 10-year and five-year average PE Ratio of Kellogg has typically been between 21.8 and 21.6, so this indicates that Kellogg could be currently trading at a low price when compared to Kellogg's average historical PE Ratio range.

Kellogg currently pays a dividend of 3.83% (or 3.82% over the last 12 months).

(Source: BTMA Stock Analyzer - Misc. Fundamentals)

The Story Behind The Dividend

With regard to dividend history, I'm first interested in knowing if the payout ratio is sustainable. At this time, it's around 62%, which means that there's still some room to grow the dividend, but the payout ratio should be watched since it's approaching high levels. Also notice that Kellogg has a regular history of buying back shares, which contributes to higher payout ratios.

If we look only at the dividend yield, we see a range of 2.74 % to 3.86%. This stock pays out a substantial dividend. Dividend payouts have increased somewhat consistently over the past seven-year period at about 2.89% compound annual growth. Also, it's positive to note that dividend yield has been increasing overall during this period. Therefore, this stock may be desirable for some dividend investors.

If I were currently interested in buying Kellogg now for the dividend, I would be trying to buy when the dividend yield was highest relative to its past. From the chart below, we can see that the dividend yield is near a high point relative to the past 10 years. Therefore, it's an ideal time to buy now if my priority is a better than average return through dividends.

Overall, the dividend situation with Kellogg is very good. On the positive side, the stock pays a substantial and consistent dividend. The dividend per share and dividend yield has been increasing over the years. Finally, the dividend yield is near a high level when compared with the past 10 years.

On the negative side, the payout ratio is approaching high levels and should be watched.

This analysis wouldn't be complete without considering the value of the company vs. share price.

Value Vs. Price

For valuation purposes, I will be using a diluted EPS of 3.63. I've used various past averages of growth rates and PE Ratios to calculate different scenarios of valuation ranges from low to average values. The valuations compare growth rates of EPS, Book Value, and Total Equity.

In the table below, you can see the different scenarios, and in the chart, you will see vertical valuation lines that correspond to the table valuation ranges. The dots on the lines represent the current stock price. If the dot is toward the bottom of the valuation range, this would indicate that the stock is undervalued. If the dot is near the top of the valuation line, this would show an overvalued stock.

(Source: BTMA Wealth Builders Club)

According to this valuation analysis, Kellogg is undervalued.

• If K continues with a growth average similar to its past 10 years earnings growth, then the stock is fairly priced at this time.
• If K continues with a growth average similar to its past 5 years earnings growth, then the stock is undervalued at this time.
• If K continues with a growth average similar to its past 10 years book value growth, then the stock is fairly priced at this time.
• If K continues with a growth average similar to its past 5 years book value growth, then the stock is undervalued at this time.
• If K continues with a growth average similar to its past 5 years total equity growth, then the stock is undervalued at this time.
• According to K's typical PE ratio relation to the S&P 500's PE Ratio, K is undervalued.
• If K continues with a growth average as forecasted by analysts, then the stock is about overpriced.

This analysis shows an average valuation of around $70 per share versus its current price of about $60, this would indicate that Kellogg (K) is undervalued. This valuation analysis also tells me that Kellogg's stock price is within normal range now, but in the next year or so, Kellogg share price is expected to fall. However, from looking at the PE ratio valuation in relation to the past 10 years, there is a lot of upswing potential for the long-term holder of Kellogg.

Past Performance

A downside to this stock is its poor growth when compared with the general US stock market. From the chart below we can see that Kellogg's share price is mostly stagnant when compared with the growth of the S&P 500 benchmark. The S&P 500's total return during this period is 270% vs. the Kellogg's 22%. Even factoring in Kellogg's dividends for this period would only increase the total return by 72% for this period, which still fails to compare to the benchmark's return.

This tells me that in most cases I would be better off to invest in a low-cost S&P 500 index fund than Kellogg. I would have more diversification and greater growth potential most of the time if I chose the S&P 500 over Kellogg.

One good thing to note is that during periods of recession (2008 crisis and March 2020 COVID-19 crisis), a stock like Kellogg could be a smart buy since it seems to maintain its price better than the benchmark. It also continues to pay consistent dividends, which could provide some peace of mind.

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If considering specific returns from the past 10-year and five-year periods, the results of Kellogg's poor growth potential speak for themselves.

10-Year Return Results if Invested in Kellogg:

Initial Investment Date: 3/16/2011

End Date: 3/16/2021

Cost per Share: $53.65

End Date Price: $59.99

Total Dividends Received: $20.16

Total Return: 49.39%

Compound Annualized Growth Rate: 4%

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5-Year Return Results if Invested in Kellogg:

Initial Investment Date: 3/16/2016

End Date: 3/16/2021

Cost per Share: $75.63

End Date Price: $59.99

Total Dividends Received: $10.97

Total Return: -6.17%

Compound Annualized Growth Rate: -1%

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Forward-Looking Conclusion

According to the facts, Kellogg is not financially healthy in a long-term sense in having enough equity as compared with debt, and its short-term stability also needs improvement because the current ratio indicates that it doesn't have enough cash to cover current liabilities.

Other fundamentals are volatile across the board, including ROE, ROIC, EPS, and Gross Margin Percent. This could be a result of the volatility of Kellogg's main commodity costs such as grains and cereals.

The dividend situation is very good as the company pays a substantial dividend with a dividend share and yield that has been increasing over the past five years. I could see why dividend investors would be initially attracted to this stock.

Lastly, this analysis shows that the stock is undervalued. The stock price is expected to face headwinds in the next year or so, but the long-term shows some positive gain potential. It's just that the gain potential isn't great enough for me to personally want to invest in Kellogg stock long term.

While I'm not interested in Kellogg for the long haul, I do believe that this stock could provide some investors with swing trade opportunities. The nature of its volatility in share price, possibly caused by swings in the commodity prices of grains and cereals, could misprice this stock enough to make some quick gains on the rebound. The risk of swing trading with this stock is also hedged by the stock's consistent dividend and the fact that Kellogg has real value in its tangible assets. Therefore, even if the share price falls, you can be assured that the company is still sitting on real value.