Kellogg Ups the Ante on Brand Spend
These investments should ensure the firm is able to weather competitive pressures.
After just completing his first year at the helm,
And while the crux of management’s strategic agenda now seems to center on growing the top line by extending the distribution of its mix and reinvesting in product innovation (including new pack formats) aligned with consumer trends both at home and abroad, we surmise further investments in its manufacturing platform will also be slated for 2019. For one, on-the-go pack sizes have been boasting outsize demand at Kellogg of late, but given the firm presently lacks the supply chain capabilities to meet this heightened demand, this growth has weighed on profits. However, we believe these investments stand to support the intangible assets that underlie its wide moat over a longer horizon.
In this vein, we don’t intend to alter our long-term forecast (2%-3% average annual sales growth through fiscal 2027 and 400 basis points of operating margin expansion to around 19% by the end of the decade) and see little change to our $81 fair value estimate. With the shares trading at a 20% discount to our valuation and when combined with its 3%-plus annual dividend yield, we think investors should look to stock up.
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