Morningstar

Kellogg Ups the Ante on Brand Spend

These investments should ensure the firm is able to weather competitive pressures.

Securities In This Article
Kellanova Co
(K)

After just completing his first year at the helm,

And while the crux of management’s strategic agenda now seems to center on growing the top line by extending the distribution of its mix and reinvesting in product innovation (including new pack formats) aligned with consumer trends both at home and abroad, we surmise further investments in its manufacturing platform will also be slated for 2019. For one, on-the-go pack sizes have been boasting outsize demand at Kellogg of late, but given the firm presently lacks the supply chain capabilities to meet this heightened demand, this growth has weighed on profits. However, we believe these investments stand to support the intangible assets that underlie its wide moat over a longer horizon.

In this vein, we don’t intend to alter our long-term forecast (2%-3% average annual sales growth through fiscal 2027 and 400 basis points of operating margin expansion to around 19% by the end of the decade) and see little change to our $81 fair value estimate. With the shares trading at a 20% discount to our valuation and when combined with its 3%-plus annual dividend yield, we think investors should look to stock up.

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About the Author

Erin Lash, CFA

Sector Director
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Erin Lash, CFA, is a sector director, AM Consumer, for Morningstar*. In addition to leading the sector team, she covers packaged food and household and personal care companies. Beyond managing a team of nine analysts and associates covering an array of consumer firms, Lash also conducts fundamental analysis of 13 multi-billion-dollar market capitalization firms in the packaged food and household and personal care space.

Before joining Morningstar in 2006, Lash spent four years as an investment analyst covering retail, transportation, and technology firms for State Farm Insurance. In this capacity, Lash analyzed financial statements, business strategy, and fundamentals of owned companies and potential investments, presenting her recommendations based on this analysis to State Farm portfolio managers for ownership consideration.

Lash holds a bachelor’s degree in finance from Bradley University’s Foster College of Business. She also holds a master’s degree in business administration, with concentrations in accounting and finance, from the University of Chicago Booth School of Business. Lash has completed the Chartered Financial Analyst® designation. She ranked second in the food and tobacco industry in The Wall Street Journal’s annual “Best on the Street” analysts survey in 2013, the last year the survey was conducted.

* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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