WK Kellogg: Shares a Bargain as the Market Dogs Domestic Cereal Maker on Tepid Growth Prospects

We are initiating coverage of WK Kellogg with a $26.50 fair value estimate and no-moat designation. We view shares as deeply undervalued, trading nearly 45% below our intrinsic valuation. We posit the market is penalizing the standalone firm’s tempered growth prospects—with a portfolio now entirely tied to the competitively challenged U.S. cereal category—while failing to appreciate the margin opportunity that should be unlocked by its supply chain modernization initiative. Indeed, we anticipate WK Kellogg will continue to face intense competition from numerous breakfast alternatives, with our top-line forecast calling for a low-single-digit decline to flat sales marks over our 10-year explicit forecast period (even as it invests around 11% of sales in research, development, and marketing). Nonetheless, we believe realigning its manufacturing footprint and facilities network and investing in technology and automation will afford profitability gains, with our midcycle operating EBITDA margin approaching 14%, up from the 9% we forecast for fiscal 2023, in line with management’s midteens target by fiscal 2026.