WK Kellogg Earnings: Results on Track, but Market Fails to Appreciate Margin Potential; Shares Cheap

We don’t plan a material change to our $26.50 fair value estimate after digesting WK Kellogg’s solid third-quarter marks. During the quarter, standalone gross and EBITDA margins swelled 290 and 310 basis points to 28.5% and 7.5%, respectively, despite a 1.9% drop in net sales, thanks to revenue growth, management efforts, and improved productivity. Still, we view shares as deeply undervalued. Current market pricing suggests just 8% EBITDA margins by 2032, by our calculations, which doesn’t seem to incorporate much margin upside from supply chain modernization and network optimization initiatives. However, we believe such efforts will enhance operational efficiencies and structurally lift profits, with the firm calling out 20% efficiency and 50% cost gaps between its lowest- and highest-cost plants. As such, we maintain our long-term forecasts for flat average top-line growth and 14% EBITDA margins, near the firm’s midteens target.