By Aaron Back
Two quarters after Kellogg spun off its cereal business to focus on snacks, shares in the unloved cereal unit are vastly outperforming both the market and its former stablemate. But the recovery might have already run its course.
WK Kellogg, the North America cereal business, is up nearly 75% from where it closed on its first day of trading as an independent company on Oct. 2. Kellanova, the renamed company that sells products such as Pop-Tarts and Pringles, as well as cereals internationally, has risen around 16% over the same period, lagging behind the S&P 500.
This fits with a common pattern seen in past spinoffs. Shareholders often dispense with what is perceived as the less attractive firm's shares upon receiving them, creating an opportunity for value-minded investors to swoop in and take advantage.
That said, recent quarterly results from the two companies have served to remind everyone why Kellanova was favored in the first place. Last week, the snack company said it increased organic sales, which strip out currency and merger impacts, by 5.4% from a year earlier in the first quarter. That was faster than analysts expected, and suggested possible upside to its guidance of approximately 3% growth for the full year.
WK Kellogg reported on Tuesday morning and said adjusted sales fell 0.8% from a year earlier. It reiterated its strategy of targeting flat sales while expanding margins by investing in better supply chain infrastructure. Pricing and sales mix accounted for 6.3% percentage points of sales growth while underlying volumes fell 7%. In an investor presentation, it acknowledged that it has continued to lose cereal market share in the U.S.
For the full year, WK Kellogg sees adjusted sales ranging from between down 1% to up 1%, and growth in adjusted earnings before interest, taxes, depreciation and amortization of 3% to 5%.
That might have been enough to get investors excited at the stock's lows weeks after the spin, when it was trading at just 6.5 times forward earnings, according to FactSet. But after its rally, it is now valued at a multiple of 15.6 times. That is actually higher than General Mills at 15.0 times, despite the latter's much stronger long-term record in both innovation and execution.
At 16.5 times forward earnings, Kellanova is trading at a discount to snacking rivals such as Mondelez and Frito-Lay owner PepsiCo, which fetch 19.6 and 21.1 times, respectively. That discount could be justified by their status as established global giants.
In other words, whatever value opportunity was presented by the spin has already been traded away. Like cereal in milk, it had to be spooned up quickly.
Write to Aaron Back at aaron.back@wsj.com
(END) Dow Jones Newswires
May 07, 2024 11:37 ET (15:37 GMT)
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