Kellogg: We Don’t Think Planned Split Paves Way for Sweeter Business Prospects, but Shares Are Tasty

After digesting separate blueprints for Kellogg’s K soon-to-be split North American cereal (WK Kellogg) and global snack (Kellanova) arms during investor events on Aug. 9, we plan to maintain our $84 sum-of-the-parts valuation for the combined firm, which is based on respective EBITDA multiples of 9 and 16 times. Further, our wide moat is unchanged for the existing enterprise, reflective of the stout brand portfolio each segment houses.

More granularly, WK Kellogg’s strategy centers around profit gains, targeting a 500-basis-point lift in adjusted EBITDA margins (to midteens) by fiscal 2026, against flat sales. We think this is attainable, as the firm modernizes its supply chain and manufacturing footprint (with $450 million to $500 million allocated to the effort over the next three years) and regains distribution points ceded since its plant fire and labor strike in 2021. Critically, we sense WK Kellogg’s commitment to invest behind its brands (through consumer-valued innovation and marketing) is unrelenting, even as it strives to boost profits. We believe this will be essential to navigating unfavorable category dynamics. However, we question whether WK Kellogg’s stand-alone retail relationships will prove durable, considering the shrinking relevance of the $10.4 billion North American cereal category (beleaguered by other breakfast alternatives) and the firm’s smaller scale post spinoff (around $2.7 billion in sales), diminishing its bargaining power.

Conversely, we think Kellanova’s scale and brand prowess stands to persist, with around $13 billion in sales. And we see a runway for growth, with a playbook that hinges on category and geographic expansion (with 60% of sales from snacks and 30% from fast-growing emerging markets). In this context, management aims for 3%-5% annual top-line growth and midteens operating margins (up for the low-teens), as it judiciously tailors its mix to local market trends and expands pack size options to extend its distribution.