Brief History
The history of Kellogg’s dates back to 1900 when the company was founded as the Sanitas Food Company by the brothers W.K. Kellogg and Dr. John H. Kellogg. W.K. Kellogg, motivated by a passion for people, quality, and innovation, created the first-ever breakfast cereal, cornflakes, in 1898, which soon became a household name. The company has since grown to operate in 180 countries across the world, upholding the values instilled by W.K. Kellogg over 100 years ago. The development of cornflakes is attributed to Dr. John Harvey Kellogg, who was a passionate vegetarian and believed in a whole grain and plant-based diet to cure common ailments of the time, such as indigestion. Additionally, Kellogg’s has expanded its product offerings to include a wide range of breakfast foods, snacks, and frozen foods, with sales regions covering North America, Europe, Latin America, Asia, and Australia.
The company’s history is also intertwined with the unusual belief held by Dr. John Harvey Kellogg that bland food, including cornflakes, would reduce people’s urge to masturbate.
Spin off
Kellogg Company completed a significant spinoff in 2023, splitting into two independent, publicly traded companies: Kellanova and WK Kellogg Co. Kellanova, focused on global snacking, international cereal and noodles, and North American frozen foods, announced the completed spin-off of its North American cereal business into WK Kellogg Co. The separation was achieved through the distribution of all of the shares of WK Kellogg Co to holders of Kellanova common stock, with Kellanova shareowners receiving one share of WK Kellogg Co common stock for every four shares of Kellanova common stock held as of the close of business on September 21, 2023. WK Kellogg Co began regular way trading on the New York Stock Exchange under the ticker symbol “KLG,” and Kellanova continued to trade on the NYSE under the ticker symbol “K”. The spin-off was part of Kellogg’s strategy to create two stronger, more focused companies, each with a strong financial outlook, and also aimed to unlock shareholder value.
The spinoff of WK Kellogg Co from its parent company, Kellogg, was met with a lukewarm reception from shareholders, with the new stock accounting for only about 5% of the value of the parent company. This led to a preference among most legacy shareholders to sell the stock in the market. The stock price of KLG experienced a significant decline falling from $21 to $9.
Cereal industry
The cereal industry has been experiencing a long-term decline in popularity. Several factors have contributed to this trend, including changing consumer lifestyles, dietary behaviors, and increased desire for healthier and gluten-free products. The competitive landscape for breakfast has also evolved, with fast food brands competing for the breakfast occasion. Additionally, the proliferation of cereal varieties has led to confusion and frustration among consumers, and the industry has struggled to adapt to modern consumer preferences. Despite a brief resurgence in cereal sales during the COVID-19 pandemic, the market has since returned to a more normal rate of decline.
Strategy moving forward
KLG owns a range of highly recognizable and established cereal brands, including Frosted Flakes, Raisin Bran, Special K, Fruit Loops, and Kashi for the health-conscious consumer. These brands have historically generated about $2.8 billion in revenue but have EBITDA margins in the mid-to-high-single digits. The company’s performance has been affected by factors such as plant fires, strikes, and operational challenges. However, with the spinoff from Kellogg, WK Kellogg Co. is focusing on becoming a more focused and efficient company.
The company plans to improve margins by eliminating silos and having a dedicated sales force. This strategy aims to drive margin improvement and regain lost share in the market. Additionally, WK Kellogg Co. plans to invest several hundred million dollars into its outdated manufacturing facilities to drive further margin improvement. By focusing on these areas, the company aims to enhance its financial performance and compete more effectively in the cereal industry.
Valuation
Management guides sales to be flat, EBITDA margins to be 9%.
On 30/11/2023 KLG trades at US$11.24 per share.
Following management guidance, we have implied a per-share value of $17.67, a 57.2% upside from the current trading price.
Key risks
WK Kellogg Co (KLG) has a high level of debt, with a net debt-to-equity ratio of 336.2%, coupled with the capital-intensive nature of the business to increase margins in a declining cereal industry.
