Kellogg Company

K Details

Kellogg Company (NYSE: K) is a leading manufacturer of snacks, cereal, and frozen foods. Its brands comprise Pringles®, Cheez-It®, Special K®, Kellogg's Frosted Flakes®, Kellogg's Corn Flakes®, among others.

Strong Performance in Q2FY21 (For the Period Ended 3 July 2021)

• The company has reported stronger than expected  results in Q2FY21 with net sales increasing by 3% YoY supported by the benefit of favorable foreign currency translation.
• Reported operating profit for the period came flattish against the same period last year  assisted by the impact of favorable mark to market and currency translation.
• Reported earnings per share rose by around 9% YoY driven by favorable mark to market and currency translation.
• Adjusted earnings per share reduced by 8% whereas excluding currency translation,  adjusted earnings per share  fell 13% owing to lapping the previous year's exceptional growth.

Consolidated Income Statement (millions, except per share data) (Source: Company Reports)

Key Risks

A shift in consumer purchases to more generic, lower-priced, or other value offerings could adversely impact the company’s  sales.  The strengthening in the U.S. dollar against specific country’s currencies where it operates, could  hit the company’s operating and financial performance.  Fluctuation in commodity and other input costs may significantly affect the company.

Outlook

Emboldened by strong momentum  in the underlying business,  the company has raised its guidance on net sales for 2021. It estimates organic net sales growth to remain between 0-1% in 2021 against its earlier forecast of flat net sales.

However, it has maintained its outlook for operating profit, earnings per share, and cash flow due to the impact of challenges in the supply chain across industries and expectation of sustenance of higher cost inflation. The currency-neutral operating profit is expected to decline by around 1%-2% YoY in 2021 while the currency-neutral adjusted earnings per share is expected to grow by 1%-2%. Further, it forecasts to generate net cash from operating activities of around $1.6-$1.7 billion and it has guided achieving cash flow of $1.1-$1.2 billion in 2021.

Valuation Methodology: EV/Sales Based Relative Valuation (Illustrative)

Stock Recommendation

The stock has been valued using EV/Sales multiple-based illustrative relative valuation method and the target price that  reflects a rise of low double-digit (in % terms) has been calculated. A slight discount has been applied to EV/Sales Multiple (NTM) (Peer Average), considering its lower current ratio at 0.76x in Q2FY21 compared to the Industry Median at 1.93x along with its higher debt to equity ratio that stood at 2.26x in Q2FY21 compared to the Industry Median at 0.52x. However, its ROE remained significantly higher at 11.7% in Q2FY21 against the Industry Median at 2.6%.

For the purposes of relative valuation, peers like Hormel Foods Corp (HRL.N), Alico Inc (ALCO.OQ), among others have been considered.

Considering the aforementioned factors along with its improved guidance on net sales and the current trading levels, we give a “Hold” recommendation on the stock at the current market price of $63.88 per share, up by 0.31% on 15^th September 2021.

Technical Overview:

Chart:

Source: REFINITIV

Note: Purple Color Line Reflects RSI (14-Period)

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.