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List of Articles Stocks and Investing Stocks I Own Stock Advice Weight Loss and Fitness Sports Donate Back to Home	A Financial Analysis of Kellogg Company Introduction Kellogg Company (K) is a $19.48 billion company in the food processing industry. Market capitalization competitors in this industry include General Mills, Wrigley Gum, and Heinz. The food processing industry is down 15.46% over the past year compared to the S&P 500 which is down 7.30% during the same period. Over the past month, the industry has been down 6.20%, while the S&P 500 has been down 4.75%. After a strong sell-off earlier in the past month, there is a strong potential for food processing companies to grow. Evidence comes from a potential recession in the horizon, and defensive stocks perform well during these times. Kellogg’s growth and valuation illustrate the potential for a strong earnings report next quarter. Business This section describes what Kellogg produces. According to Reuters, Kellogg “is engaged in the manufacture and marketing of ready-to-eat cereal and convenience foods.” The Company sells its products to retail grocers such as Kroger for further resale. This type of supply-chain operation is direct. More interestingly, Kellogg is a multinational company. It operates in over 180 countries. Now as the Company sells fairly inelastic goods, some investors may not bother calculating sales gains from cheaper foreign imports. However, because the dollar has depreciated so dramatically over the past year, the margin of increased sale is sure to be somewhat noticeable. Moreover, because the Company’s product is defensive compared to other industries, domestic consumers will still continue to purchase products, regardless of unemployment or income levels. More specific to the types of products Kellogg produces, many of these goods are familiar to the general consumer. Regarding cereal, some products include Apple Jacks, Raisin Bran, Pops, and Frosted Flakes. The Company also has specific brand name products in different countries, such as BeBig for Asia. Besides cereals, Kellogg also produces convenience foods. Some examples include Rice Krispies, Pop Tarts, Eggos, and Nutri-Grain bars. And again, some other products are found in different nations. As mentioned before, most of these products are sold directly to grocers and other retailers, with Wal-Mart being the lead customer. Growth Kellogg has illustrated solid growth prospects over the past year. According to Reuters, Kellogg reported an $11.78 billion revenue product last year. This number is over 7.97% higher than it was the previous year. Compared to the industry’s average of 16.73%, some investors may question the large discrepancy between the two averages. However, Kellogg is one of the top leaders, both market-cap and revenue wise, for the food processing industry. Comparing the revenue growth figure to market-cap competitors and investors can have a more relevant range. General Mills only grew 6.82% during the same period year over year, and Heinz only grew 6.79% during that same time period. And these two rivals have similar or lower revenue figures. In terms of EPS growth, Kellogg saw growth of over 9.88%. However, market-cap competitor General Mills only reported an 8.58% increase in earnings. What’s even more interesting is Kellogg’s five year averages for these numbers. Kellogg usually averages earnings growth of 9.50%. This Company’s earnings are higher to the industry’s five year average 7.80%. And the earnings growth average is even higher than both Wrigley and Heinz, which is an excellent attribute. Therefore, there is a significant historical evidence of a strong financial background, which may have implications of further success. Another way to evaluate Kellogg’s growth can come through margins. Over the past year, Kellogg has seen gross, operating, and net income margins of 43.98%, 15.86%, and 9.37%. Comparing these numbers to the industry averages of 29.97%, 10.41%, and 6.22% respectively, there is evidence that Kellogg is controlling its cost and producing more money for every dollar of revenue. These figures are in line with the company’s five year averages (which show strong precedence), and these figures are also higher than the gross, operating and net income margins of competitors Heinz and General Mills. Therefore, along with strong growth prospects, Kellogg illustrates its capability to control both product and period costs. Combining these bits of information together and ROE emerges. ROE is how much net income is produced for every dollar of shareholder equity. According to Reuters, Kellogg saw an ROE of 48.01% over the past fiscal year. While this number is below the five year average of 48.81%, the number is significantly higher than the industry average of 21.73% and the competitors’ averages of 18.99% (General Mills), 24.28% (Wrigley) and 39.27% (Heinz). While investors may be cautious that ROE is dropping year over year, investors need to realize that the past couple of months have been tough for the economy. However, once the economy starts to grow again, there is the potential for Kellogg’s continued growth, especially given the company’s historical five year average figures. The same logic also applies for Kellogg’s 7.94% ROA and 10.43% ROI. Valuation With fairly high growth estimates and historical data, there should be evidence of an overvalued company. However, this is not the case. Currently the industry supports a P/E ratio average of 19.69 and a price to sales average of 1.26. Kellogg sees a forward P/E ratio of 17.12 and a forward price to sales ratio of 1.60. While much can be said about the stock market’s recent bear run, there is plenty of evidence regarding growth that Kellogg’s share price has been hit too hard. While some investors may claim the same is true for all companies in this industry, a few ideas emerge. Wrigley’s valuation is high at 23.04, despite weaker growth expectations. The trend is an excellent resource, and given Kellogg’s previous financial success, the company is too undervalued given its growth prospects. Further evidence comes from Kellogg’s low PEG ratio of 1.87, which is lower than competitors’ figures such as 2.12 or 2.09 (Wrigley and Heinz respectively). Efficiency Kellogg is efficient. Inventory turnover at 7.55 follows a better pattern compared to the industry’s 6.92 number. Moreover, asset turnover is also strong at 1.07 compared to competitor figures (General Mills at 0.68). Receivables turnover also illustrates a number of 11.95, illustrating cash received every 30 days, instead of the industry average 32 days. In terms of liquidation, Kellogg’s current ratio is 0.67. Some investors may wonder about such a highly risky figure, but because interest rates are low and Kellogg is a reputable company, incurring extra cash from loans may not be such a bad idea. The company’s capital expenditures have increased, which means further increases in capacity and economies of scale may be present in the future, because of this financing. Moreover, institutions own 82.08% of all Kellogg shares. Since the institutional investors have a larger gross amount of capital to lose compared to the retail investor, a high institutional percentage illustrates confidence in the stock's ability. The company also supports a dividend yield of 2.42%, which is higher than Wrigley’s yield (2.34%). Technical Analysis Kellogg performed flat in the past year. The company’s share price has increased 4.05% year-to-year. This type of growth is stable for a recessionary-type economy, especially considering some food processing company’s recent hard-hit. There seems to be some support at the 48 dollar share price range dating back to earlier January 2008. The last time Kellogg reached this amount the company rebounded and appreciated 7%. There is a possibility a similar situation could occur in the future. More specific to the current month, Kellogg illustrates strong technical signals. Parabolic SAR is below and upward trending the current share price. This event usually signals an upturn in share price. The company is a little undervalued compared to the RSI index at 50.79, but it is better to be an advocate of fundamental valuations before technical valuations. Therefore, while now isn't the most ideal time to purchase shares of Kellogg according to technical analysis, purchasing shares will still produce strong long terms gains. Conclusion Kellogg is a great acquisition for any portfolio. The company's business model and fundamental analysis are both strong. It is very rare to find a company that has both strong valuation and growth, so it is wise to take advantage of these situations as they arise. -Dennis Biray February 15th, 2008 ©2008 BirayNetworks. All Rights Reserved

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A Financial Analysis of Kellogg Company

Introduction

Kellogg Company (K) is a $19.48 billion company in the food processing industry. Market capitalization competitors in this industry include General Mills, Wrigley Gum, and Heinz. The food processing industry is down 15.46% over the past year compared to the S&P 500 which is down 7.30% during the same period. Over the past month, the industry has been down 6.20%, while the S&P 500 has been down 4.75%. After a strong sell-off earlier in the past month, there is a strong potential for food processing companies to grow. Evidence comes from a potential recession in the horizon, and defensive stocks perform well during these times. Kellogg’s growth and valuation illustrate the potential for a strong earnings report next quarter.

Business

This section describes what Kellogg produces. According to Reuters, Kellogg “is engaged in the manufacture and marketing of ready-to-eat cereal and convenience foods.” The Company sells its products to retail grocers such as Kroger for further resale. This type of supply-chain operation is direct. More interestingly, Kellogg is a multinational company. It operates in over 180 countries. Now as the Company sells fairly inelastic goods, some investors may not bother calculating sales gains from cheaper foreign imports. However, because the dollar has depreciated so dramatically over the past year, the margin of increased sale is sure to be somewhat noticeable. Moreover, because the Company’s product is defensive compared to other industries, domestic consumers will still continue to purchase products, regardless of unemployment or income levels.

More specific to the types of products Kellogg produces, many of these goods are familiar to the general consumer. Regarding cereal, some products include Apple Jacks, Raisin Bran, Pops, and Frosted Flakes. The Company also has specific brand name products in different countries, such as BeBig for Asia. Besides cereals, Kellogg also produces convenience foods. Some examples include Rice Krispies, Pop Tarts, Eggos, and Nutri-Grain bars. And again, some other products are found in different nations. As mentioned before, most of these products are sold directly to grocers and other retailers, with Wal-Mart being the lead customer.

Growth

Kellogg has illustrated solid growth prospects over the past year. According to Reuters, Kellogg reported an $11.78 billion revenue product last year. This number is over 7.97% higher than it was the previous year. Compared to the industry’s average of 16.73%, some investors may question the large discrepancy between the two averages. However, Kellogg is one of the top leaders, both market-cap and revenue wise, for the food processing industry. Comparing the revenue growth figure to market-cap competitors and investors can have a more relevant range. General Mills only grew 6.82% during the same period year over year, and Heinz only grew 6.79% during that same time period. And these two rivals have similar or lower revenue figures. In terms of EPS growth, Kellogg saw growth of over 9.88%. However, market-cap competitor General Mills only reported an 8.58% increase in earnings. What’s even more interesting is Kellogg’s five year averages for these numbers. Kellogg usually averages earnings growth of 9.50%. This Company’s earnings are higher to the industry’s five year average 7.80%. And the earnings growth average is even higher than both Wrigley and Heinz, which is an excellent attribute. Therefore, there is a significant historical evidence of a strong financial background, which may have implications of further success.

Another way to evaluate Kellogg’s growth can come through margins. Over the past year, Kellogg has seen gross, operating, and net income margins of 43.98%, 15.86%, and 9.37%. Comparing these numbers to the industry averages of 29.97%, 10.41%, and 6.22% respectively, there is evidence that Kellogg is controlling its cost and producing more money for every dollar of revenue. These figures are in line with the company’s five year averages (which show strong precedence), and these figures are also higher than the gross, operating and net income margins of competitors Heinz and General Mills. Therefore, along with strong growth prospects, Kellogg illustrates its capability to control both product and period costs.

Combining these bits of information together and ROE emerges. ROE is how much net income is produced for every dollar of shareholder equity. According to Reuters, Kellogg saw an ROE of 48.01% over the past fiscal year. While this number is below the five year average of 48.81%, the number is significantly higher than the industry average of 21.73% and the competitors’ averages of 18.99% (General Mills), 24.28% (Wrigley) and 39.27% (Heinz). While investors may be cautious that ROE is dropping year over year, investors need to realize that the past couple of months have been tough for the economy. However, once the economy starts to grow again, there is the potential for Kellogg’s continued growth, especially given the company’s historical five year average figures. The same logic also applies for Kellogg’s 7.94% ROA and 10.43% ROI.

Valuation

With fairly high growth estimates and historical data, there should be evidence of an overvalued company. However, this is not the case. Currently the industry supports a P/E ratio average of 19.69 and a price to sales average of 1.26. Kellogg sees a forward P/E ratio of 17.12 and a forward price to sales ratio of 1.60. While much can be said about the stock market’s recent bear run, there is plenty of evidence regarding growth that Kellogg’s share price has been hit too hard. While some investors may claim the same is true for all companies in this industry, a few ideas emerge. Wrigley’s valuation is high at 23.04, despite weaker growth expectations. The trend is an excellent resource, and given Kellogg’s previous financial success, the company is too undervalued given its growth prospects. Further evidence comes from Kellogg’s low PEG ratio of 1.87, which is lower than competitors’ figures such as 2.12 or 2.09 (Wrigley and Heinz respectively).

Efficiency

Kellogg is efficient. Inventory turnover at 7.55 follows a better pattern compared to the industry’s 6.92 number. Moreover, asset turnover is also strong at 1.07 compared to competitor figures (General Mills at 0.68). Receivables turnover also illustrates a number of 11.95, illustrating cash received every 30 days, instead of the industry average 32 days. In terms of liquidation, Kellogg’s current ratio is 0.67. Some investors may wonder about such a highly risky figure, but because interest rates are low and Kellogg is a reputable company, incurring extra cash from loans may not be such a bad idea. The company’s capital expenditures have increased, which means further increases in capacity and economies of scale may be present in the future, because of this financing. Moreover, institutions own 82.08% of all Kellogg shares. Since the institutional investors have a larger gross amount of capital to lose compared to the retail investor, a high institutional percentage illustrates confidence in the stock's ability. The company also supports a dividend yield of 2.42%, which is higher than Wrigley’s yield (2.34%).

Technical Analysis

Kellogg performed flat in the past year. The company’s share price has increased 4.05% year-to-year. This type of growth is stable for a recessionary-type economy, especially considering some food processing company’s recent hard-hit. There seems to be some support at the 48 dollar share price range dating back to earlier January 2008. The last time Kellogg reached this amount the company rebounded and appreciated 7%. There is a possibility a similar situation could occur in the future.

More specific to the current month, Kellogg illustrates strong technical signals. Parabolic SAR is below and upward trending the current share price. This event usually signals an upturn in share price. The company is a little undervalued compared to the RSI index at 50.79, but it is better to be an advocate of fundamental valuations before technical valuations. Therefore, while now isn't the most ideal time to purchase shares of Kellogg according to technical analysis, purchasing shares will still produce strong long terms gains.

Conclusion

Kellogg is a great acquisition for any portfolio. The company's business model and fundamental analysis are both strong. It is very rare to find a company that has both strong valuation and growth, so it is wise to take advantage of these situations as they arise.

-Dennis Biray
February 15th, 2008