Kellogg Pours Out Solid Q3 Organic Sales Growth, Though Profits Sour; Shares Still Attractive

We perceive the high-single-digit rout in wide-moat Kellogg’s share price as unjustified following fair third-quarter results, which included more than 13% organic growth. While these marks were driven entirely by higher prices (up nearly 16%), the mere 2% volume retreat strikes us as quite subdued. We believe this a testament to the strategic course (boosting investments in brands and capabilities) Kellogg embarked on a number of years ago. Even as inflationary headwinds and crimped supply chains persist, evidenced by a 140-basis-point erosion in adjusted gross margins (to 30.8%) in the quarter, we don’t surmise that price hikes are Kellogg’s only mechanism through which to lessen the profit hit. Rather, we continue to anticipate the pursuit of cost saves and price/pack management will remain key facets of the equation. Encouragingly, even in the face of these challenges, management’s rhetoric suggests brand support hasn’t faltered; our forecast calls for Kellogg to expend 7% of sales ($1.2 billion) on research, development, and marketing in the aggregate annually the next decade, which we view as prudent against the intense competitive landscape.