Is Kellogg’s Still a Special Treat for Investors?

 
on March 06 2013 1:36 PM
Boxes of Kellogg's cereal are seen stacked in a supermarket in New York
Boxes of Kellogg's cereal are seen stacked in a supermarket in New York Reuters

With shares of Kellogg Company (NYSE:K) trading at around $61.42, is K an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Kellogg is dealing with several challenges at the moment, which include cost inflation, intense competition, supply chain problems, a struggling cereal business, poor debt management, and even a lack of innovation. Ouch! These aren’t nice things to say about a company that has delivered such tasty treats through the years. But fear not! Kellogg has a game plan, and it’s more motivated than Meg and Jack White taking on a seven nation army.

Kellogg is a household name. As long as that’s the case, there will be great potential. Kellogg is very focused on cutting costs, and it has seen organic growth as of late. That’s really all you can ask for at the moment. Kellogg is also seeing increased international exposure.

Despite recent headwinds, Kellogg has maintained solid margins. ROE is 44.93 percent. There is a small short position of 1.90 percent on the stock. Not many people are interested in shorting this stock due to the company’s strong future prospects. Past stock performance, which has been exceptional, might also be a factor. Currently, Kellogg is currently trading at 23 times earnings, which is slightly higher than the industry average of 20 times earnings.

Let’s take a look at more important numbers prior to forming an opinion on this stock.

E = Equity to Debt Ratio Is Weak

The debt-to-equity ratio for Kellogg is much weaker than the industry average of 0.80. The balance sheet is in negative territory. Operating cash flow is $1.76 billion.

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T = Technicals on the Stock Chart Are Strong      

Kellogg hasn’t been a top performer, but it’s not expected to be. The stock has steadily climbed north over the past several years. The one negative is that it has underperformed competitors, such as General Mills (NYSE:GIS) and Campbell Soup (NYSE:CPB). When it comes to dividend yield, Kellogg is a slight winner in this group. Kellogg currently yields 2.90 percent, while General Mills and Campbell Soup both yield 2.80 percent.

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At $61.42, Kellogg is currently trading above all its averages.

50-Day   SMA

58.17

100-Day   SMA

56.12

200-Day   SMA

52.97

E = Earnings Have Been Inconsistent          

Earnings have been a bumpy road, but at least there are consistent profits. Revenue has improved over the past two years.

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When we look at the last quarter on a year-over-year basis, we see an improvement in earnings and revenue.

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Now let’s take a look at the next page for the Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Support the Industry

Throughout the history of the stock market, there is at least one strategy that has proven to bring positive results. That is to simply spread your investments out over consumer staples stocks that pay dividends. The vast majority of them are winners in the long run, which has everything to do with their products being used in our lives every day. Therefore, economic trends don’t play too much of a role. Trends always support the industry.

Conclusion

There have been some ups and downs for Kellogg through the years, but the stock always eventually heads north.

Kellogg is an OUTPERFORM.

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