Kellogg Company (K) provides ready to eat cereals and convenient food products. It has reported a growth rate of 7.6% in net sales for 2012. The company has managed to beat the analysts' expectations by reporting an earnings surprise of 6.10% in 4Q'12. The key growth drivers include strong product innovation and leading productivity programs. The company's P/E is a multiple of 23.08x, which is below its five-year average and I firmly believe that it is a strong entry point for Kellogg.
How acquisition of Pringles has helped
The acquisition of Pringles has helped K to launch its snack platform, which is well established in both domestic and international markets. Whereas, in some international markets Pringles is way more established then K's other brands. Pringles has managed a double-digit growth rate in Russian and other emerging markets along with single-digit growth rates in Latin America and North America. Moreover, Pringles is expected to provide synergies because of its presence in 150 countries all over the globe in the form of enhanced distribution channels and experienced human resource from P&G.
The company has a great potential in various international markets. Investment focus for 2013 is on Brazil, India and South Africa where K is all set to take the advantage of low per capita consumption. Furthermore, a lot of white spaces are available in Eastern Europe and some other parts of Asia as well. The following table shows the international internal growth rates among several key regions
Source: Company Data
K has also adopted the volume to value strategy, which enables the company to focus on its core brands, i.e., ones with the highest margins. So, it means that the company is targeting the right areas where it can effectively contribute to the bottom line.
K is launching several new products such as "To go breakfast beverage" and is on the way to launch it at a national level. It has also launched Kellogg's corn flakes and porridge to cater the demands of those customers who want their breakfast to be served hot. Moreover, the company is taking keen interest to grab any opportunity to expand its product mix and enjoy the synergies, e.g. the joint venture with Vilmar, which is the third-largest consumer goods player in China. In 2013, K is expected to retain its innovation spending at around $900 million. Frozen food has a cumulative average growth rate of 8.5% over the last 10 years and it has an immense potential as it has already transformed into a $1 billion business.
Major risk is of foreign exchange as the company drives around 35% of its total revenue from international markets. It can be minimized with the help of hedging activities but most of these markets do not have a sound financial framework to support such activities. Another significant risk is the rise in input cost. Moreover, K might face obesity costs as the consumers have a tendency to shift towards more healthy products.
The company provides an excellent growth opportunity with a growth estimate of 7.30% for the next five years. It provides a decent mix of price appreciation and dividend yield of 2.90% in a current low-yield environment. K is comfortably placed in terms of its solid brand positioning and its expanding footprint in both international and domestic markets.