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The US consumer goods manufacturer Kellogg Company (NYSE:K) was founded in 1906 and currently has 31,000 employees. The company is engaged in both the manufacturing and marketing of snacks and convenience foods. The brands sold by the consumer goods manufacturer include Pringles, Kellogg's and Cheez-It, to name just a few. I have presented my investment thesis as follows:

Kellogg is a company from the non-cyclical consumer goods industry. This industry is characterized by the fact that companies are able to generate relatively stable revenue and profits over time. Products from the consumer goods industry are consistently in demand even during economically difficult times. Another characteristic of this industry is the strong competition and relatively limited growth prospects for most companies from the sector. The Economist Intelligence Unit expects growth in retail volumes worldwide to slow to 3.3% in 2022.

However, investors who are long-term oriented and who primarily focus on dividend income, as well as investors who are looking for attractive investments to reduce the volatility of their investment portfolio, can find attractive companies in this industry. One of which is the Kellogg Company, which I will analyze in more detail in this article.

The products of Kellogg are manufactured in 21 countries and their products are marketed in more than 180 countries across the world. Kellogg's products are sold to retailers via direct sales in order to be resold to consumers.

Kellogg distinguishes among the following business units: snacks, cereals, frozen as well as noodles and other. In the business unit of snacks, Kellogg generated a revenue of $6.807 billion in 2021. This is 48% of its total revenue in 2021 and makes snacks the most important business unit in terms of revenue. In the business unit cereal, Kellogg generated a revenue of $5.123 billion, which at 36% of their total revenue is the second most important business unit. The business unit of frozen (8% of the total revenue) as well as the business unit noodles and other (also 8% of the total revenue) account for a smaller proportion of Kellogg's total revenue.

The revenue of the business unit snacks increased from $6.281 billion in 2020 to $6.807 billion in 2021. This corresponds to a rise of 8.4%. In contrast, revenue of the business unit cereals decreased from $5.433 billion in 2020 to $5.123 billion in 2021, corresponding to a decline of 5.7%. The frozen business unit shows a decrease of 2.9% and the noodles and other business unit increased by 24.8%.

The fact that Kellogg's second most important business unit of cereals suffered a revenue decrease in 2021 in comparison to 2020, reflects the growth challenges they are facing and furthermore reflects characteristics of the low growing business environment, in which the company is operating.

Kellogg's consolidated net sales increased from $13.770 billion in 2020 to $14.181 billion in 2021. This is a rise of about 3%. In the same period, Kellogg's EBIT decreased from $1,782 billion to $1,680 billion, resulting in a decrease of 5.7%. The decline in Kellogg's EBIT in 2021 in comparison to 2020, can be interpreted as another indicator of their current growth difficulties.

Kellogg's average revenue growth of the past five years has been 1.4% per year. This low revenue growth is further evidence that Kellogg operates in a challenging business segment.

For a more detailed analysis, I will look at the results from each of the geographic markets in which Kellogg operates. The company differentiates between North America, Europe, Latin America and AMEA (Asia Pacific, Middle East and Africa).

In North America, net sales decreased from $8,361 billion in 2020 to $8,174 billion in 2021. This is a decline of 2.2%. In Europe, net sales increased from $2,232 billion in 2020 to $2,397 billion in 2021, resulting in a rise of 7.4%. In Latin America net sales went up from $914 billion in 2020 to $997 billion in 2021, which means a growth in net sales of 9.1%. In AMEA, net sales saw an increase from $2,263 billion in 2020 to $2,613 billion in 2021, resulting in a gain of 15.5%.

With a 57.6% share of total revenue, North America is the most important market for Kellogg, followed by AMEA (18.4%), Europe (17%) and Latin America (7%). The fact that North America revenue decreased in 2021 compared to 2020, is a further indicator of the difficulties Kellogg face in expanding their business.

Due to the high and relatively stable earnings that Kellogg generates year over year, the company is able to spend a substantial proportion of its earnings on the research and development of new products as well as in the marketing of its existing products. In 2021, Kellogg spent $134 million on research and development and $790 million on advertising. Those spendings make it more difficult for potential competitors to enter into the already highly competitive consumer goods market.

Furthermore, Kellogg has managed to build brands and to create a product distribution network during its more than 100 years of history as a company. Furthermore, they have been able to build economies of scale that help the company to stand out against their competitors. With Pringles, Kellogg owns a strong consumer brand that the company acquired from Procter & Gamble (PG) back in 2012. With the brands Kellogg's and Cheez-It, the company has a number of important brands in its product portfolio that consumers have been familiar with for decades.

The fact that Kellogg has already existed for more than 100 years, shows us that the company has been able to adapt to different consumer preferences over time. Therefore, I expect the company to respond successfully to changes in consumer preferences in the future.

I believe that the competitive advantages listed above will ensure that Kellogg will continue to be able to generate stable profits in the future. Due to the company's proven ability to generate high profits even in economically challenging times, I assume that Kellogg's stock will continue to be less volatile than the broader stock market. For this reason, I assume, that you will be able to reduce the volatility of your investment portfolio by investing in Kellogg.

It has previously been shown that Kellogg recorded its largest revenue increase in the AMEA region, with a rise in net sales of 15.5%, followed by Latin America with a growth of 9% in 2021 compared to 2020.

Due to the fact that populations are growing faster in countries of the AMEA region as well as in Latin America, compared to North America and Europe, I expect that these regions will continue to offer Kellogg's the highest growth prospects in the future.

In my view, the cereals business unit will continue to offer very limited growth opportunities. This is due to the fact that people usually only have breakfast once a day. Only in the AMEA and Latin America region I do see some growth potential for this business unit due to the growing population as well as the growing middle class of its countries. I assume that the business unit of snacks will continue to offer higher growth prospects in comparison to the cereals business unit.

Due to the fact that Kellogg has only grown its revenue by 1.4% on average per year in the last 5 years and the ongoing limited growth opportunities, I expect that they will continue to grow at low growth rates in the future.

However, although growing at low growth rates, I believe that Kellogg's high and relatively stable profits continue to contribute to the fact that the company's stock will be less volatile than that of the broader stock market.

In terms of valuation, I have used the EPS Multiplier Method to determine the intrinsic value of Kellogg. The method calculates a fair value of $50.25 for the company. At the current share price, this results in a downside of 26.6%.

In the next sections, I will explain the assumptions of my calculation:

The Seeking Alpha EPS Diluted Growth (FWD) rate of Kellogg is 2.5%. Therefore, I assume an EPS growth rate of 3% for the company over the next 20 years. I have used Kellogg's current discount rate (WACC) of 4.85% to calculate a fair value.

My calculations are based on the following information as presented below:

Company Ticker

K

EPS

$4.36

Discount Rate

4.85%

Growth Rate for the Next 20 Years

3%

Current Stock Price

$68.42

PE Ratio

15.69

Based on the above assumption, I calculated the following results:

Intrinsic Value

$50.25

Current Stock Price

$68.42

Margin of Safety

-36.20%

Upside/Downside

-26.60%

Source: The Author

Kellogg's P/E Ratio is currently 16.61 while their average P/E Ratio of the last 5 years is 17.02. The comparison shows us that the current P/E Ratio of Kellogg's is 2.42% lower than its average P/E Ratio from the last five years. This indicator suggests that the company is currently slightly undervalued.

When comparing Kellogg's P/E Ratio of 16.61 with the sector medium of 20.58, it provides us with another indicator suggesting that Kellogg is currently undervalued. The current P/E Ratio is 19.29% below the sector medium.

Kellogg

PepsiCo

Kraft-Heinz

Nestle

Danone

Market Cap

22.95B

235.73B

51.64B

352.71B

36.23B

Revenue

14.18B

79.47B

26.04B

95.88B

27.64B

Revenue Growth 5 Year (CAGR)

1.81%

4.82%

-0.20%

-0.52%

2.04%

EBIT Margin

14.26%

14.85%

21.01%

17.04%

13.74%

P/E GAAP (FWD)

16.61

25.39

16.28

26.96

16.92

Dividend Yield (FWD)

3.40%

2.49%

3.75%

2.37%

4.11%

Dividend Payout Ratio

55.40%

67.96%

54.42%

45.38%

65.99%

Dividend Growth 5 Yr (CAGR)

2.41%

Link:
Kellogg: A Stock To Reduce The Volatility Of Your Investment Portfolio - Seeking Alpha