Time To Book Profits on This NYSE-Listed Consumer Staples Major – K

Apr 07, 2022 12:00 AM PDT | Team Kalkine
Time To Book Profits on This NYSE-Listed Consumer Staples Major – K


Kellogg Company

Kellogg Company (NYSE: K) is a leading global cereal, cookie, cracker, and other packaged food manufacturer and marketer. Its products are made in 21 countries and sold in over 180 different nations. Special K, Frosted Flakes, Froot Loops, Rice Krispies, Pop-Tarts, Eggo, Kashi, and Morningstar Farms are among the company's well-known brands. 

Why should Investors Book Profits?

  • Deterioration in Margins: The company's Gross and EBITDA margins decreased sequentially in FY21 (ended January 01, 2022) to 29.9% and 14.4%, respectively, from 31.0% and 14.5% in FY20.
  • Drop-in Liquidity: At the end of January 01, 2022, the company's current ratio was 0.64x, down from 0.76x at the end of January 01, 2021. During the same period, it is much lower than the industry median of 1.79x.
  • Leveraged Balance Sheet: The company's debt/equity ratio was 1.91x as of January 01, 2022, compared to the industry median of 0.60x. Furthermore, its long-term debt-to-total-capital ratio was 55.3% during the same time, compared to 26.6% for the industry norm. As a result, the company's balance-sheet risk has grown.
  • Unfavourable Technical Indicators: On the weekly chart, K's price is trading below the horizontal trend line and facing the resistance of the same. Moreover, the momentum oscillator RSI (14-period) is trading at ~67.95, approaching the overbought zone. However, the price is trading above the trend-following indicators 21-period and 50- period SMA, which may be immediate support. An important support level for the stock is placed at USD 58.90, while the critical resistance level is placed at USD 69.50.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation

(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company's FY1 trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:

Kellogg's share price has been relatively stable throughout the year, slightly increased by 3.87% in the past week and is currently trading around the higher band of the 52-week range of USD 59.54 to USD 68.60. We have valued the stock using the EV/Sales based relative valuation methodology and arrived at a target price of USD 60.00.

Considering the decline in margins, collapse in liquidity, highly leveraged balance sheet, current valuation, and other technical indicators, we recommend a "Sell" rating on the stock at the closing price of USD 66.55, up 1.16% as of April 06, 2022.

Three-Year Technical Price Chart (as of April 06, 2022). Source: REFINITIV, Analysis by Kalkine Group

* The reference data in this report has been partly sourced from REFINITIV.

* All forecasted figures and industry information have been taken from REFINITIV.