A Healthier Kellogg on the Horizon

A Healthier Kellogg on the Horizon
Securities In This Article
Kellanova Co
(K)

Erin Lash: Much angst within the consumer product space over the last several years has centered on an inability of firms to generate sustainable top-line growth. However, many operators within the space have begun to reverse course, posting low- to mid-single-digit organic sales gains in the most recent period. We attribute this improvement to efforts to increase the agility in their innovation pipelines and bring decision-making for new products down closer to the end consumer.

However, Kellogg has been the exception. While Kellogg continues to post improving top-line performance of nearly 3% organic sales growth in the most recent period, the market continues to punish the name, given continued erosion in its margins. However, we attribute the margin shortfalls to investments the firm is making, both behind its brands as well as behind its manufacturing footprint, particularly in emerging and developing markets, which we think should support the long-term health of the business, even at the expense of near-term profits.

As such, we view the nearly 20% discount relative to our $78 fair value estimate as quite attractive at present, particularly given shares also offer a 3.5% dividend yield. In this vein, we think investors should stock up on this wide-moat name.

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About the Author

Erin Lash, CFA

Sector Director
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Erin Lash, CFA, is a sector director, AM Consumer, for Morningstar*. In addition to leading the sector team, she covers packaged food and household and personal care companies. Beyond managing a team of nine analysts and associates covering an array of consumer firms, Lash also conducts fundamental analysis of 13 multi-billion-dollar market capitalization firms in the packaged food and household and personal care space.

Before joining Morningstar in 2006, Lash spent four years as an investment analyst covering retail, transportation, and technology firms for State Farm Insurance. In this capacity, Lash analyzed financial statements, business strategy, and fundamentals of owned companies and potential investments, presenting her recommendations based on this analysis to State Farm portfolio managers for ownership consideration.

Lash holds a bachelor’s degree in finance from Bradley University’s Foster College of Business. She also holds a master’s degree in business administration, with concentrations in accounting and finance, from the University of Chicago Booth School of Business. Lash has completed the Chartered Financial Analyst® designation. She ranked second in the food and tobacco industry in The Wall Street Journal’s annual “Best on the Street” analysts survey in 2013, the last year the survey was conducted.

* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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