Sometimes, Microsoft Excel spreadsheets do more harm than good…
About a month ago, Kellogg (K) announced a plan to split itself into three independent, publicly traded companies. These three businesses will cover breakfast cereals, snack foods, and plant-based foods.
When companies announce plans like that, most Wall Street analysts turn to Excel…
First, they plug in each division’s current earnings. Then, they estimate a potential price-to-earnings ratio for each of the soon-to-be-traded stocks.
Next, they multiply the numbers. And finally, they add everything up for a projected total.
With Kellogg, the analysts’ Excel projections aren’t much different from the combined company’s stock price today. So an easy, arbitrage-like win doesn’t exist in this case.
Kellogg’s growth history is mundane as well. Four out of five factors in the Earnings category are ranked “neutral” today. And the analyst rating trend factor in the Experts category is rated as “very bearish.”
So overall, analysts aren’t that into the stock. But the thing is…
These analysts are missing a lot about Kellogg’s future potential.
Let me explain…
In short, our Power Gauge system ranks Kellogg as “bullish” today. It’s one of only 56 stocks in the S&P 500 Index that gets a “bullish” or better rating from the system right now.
It gets better when we dig deeper into the company…
Kellogg ranks “very bullish” in the Power Gauge factors for relative strength versus the overall market and the Chaikin Money Flow indicator (which tracks the “smart money”). And it receives “bullish” grades for price strength and the volume trend.
These four factors are all part of the Technicals category in the Power Gauge. That’s important because this factor category gives us an idea of what to expect in the future.
Using Excel to break down numbers is great. I use spreadsheets all the time. But it’s critical to realize when the numbers don’t tell the full story…
The current numbers don’t show the potential for each of Kellogg’s businesses to be better in the future (meaning more earnings than now). It comes down to resource allocation.
Imagine you work for the cereal group at Kellogg…
The COVID-19 pandemic reignited interest in convenient, ready-to-eat, shelf-stable breakfast choices like cereal. Better still, countries in the Asia Pacific region, the Middle East, and Africa are picking up on this trend.
In other words, cereal is again becoming a growth market.
It’s an area worth pursuing if you’re a Kellogg employee. But good luck trying to get resources from management to try to capitalize on this growth opportunity.
You see, Kellogg’s massive snack-foods division demands most of the capital. The division accounted for around $11.4 billion in revenue and $2 billion in operating profits in 2021.
Those numbers crush the cereal division’s revenue and profits of roughly $2.4 billion and $250 million, respectively. That’s why management won’t shortchange the snack-foods division.
Kellogg’s snack-foods division includes well-known brands like Pringles, Cheez-It, Club, Town House, Pop-Tarts, Rice Krispies Treats, and Nutri-Grain. And it’s fighting tooth and nail with big rivals in the space like PepsiCo (PEP), Mondelez (MDLZ), and Utz Brands (UTZ).
Meanwhile, it would be much worse if you worked for the plant-based-foods division…
This is a hot business for both investors and consumers. It could potentially develop many new products and win over a lot of new interest.
Kellogg has a big lead in the space. The company’s MorningStar Farms brand dates back to 1974.
And it’s profitable, too…
The brand accounted for about $340 million in sales in 2021. That’s less than Beyond Meat’s (BYND) $465 million in 2021 sales. But Beyond Meat posted a $175 million operating loss last year. MorningStar Farms produced a roughly $50 million profit over the same span.
Still, between cereals and snack foods, this division can’t catch a break in terms of capital.
A better allocation of resources is exactly why Kellogg’s split is a great idea.
This move creates an incredible opportunity for all three divisions – and in turn, investors. Kellogg’s top brass wants to give each group a better chance to maximize its potential.
And as I said earlier, the Power Gauge agrees. It’s currently “bullish” on Kellogg’s stock.
Analysts using Excel spreadsheets might not see Kellogg as a great buying opportunity right now. But when you dig a little deeper into the split, you can see that the future looks bright.
Good investing,
Marc Gerstein
