Kellogg’s is a food manufacturing company which is a market leader in convenience food. Its main products are ready-to-eat cereals but it also produces chips, biscuits and other snacks. The company was founded by the Kellogg brothers in 1898 and has become the second largest food producer in the USA after Pepsico. Nowadays Kellogg's presents in 21 countries and sells its products in 180 countries across the world.
| 2018 | 2019 | 2020 | 2021 | 2022 | |
|---|---|---|---|---|---|
| Revenue (m USD) | 13547 | 13578 | 13770 | 14181 | 15315 |
| ROE | 51,36% | 34,95% | 40,20% | 40% | 24,36% |
| EBITDA (m USD) | 2222 | 1885 | 2240 | 2219 | 2113 |
| EBITDA margin % | 16,40% | 13,88% | 16,27% | 15,65% | 13,80% |
| Dividend (USD) | 2,2 | 2,26 | 2,28 | 2,31 | 2,34 |
| Dividend yield % | 3,82% | 3,27% | 3,66% | 3,68% | 3,28% |
Regarding its revenue, it delivers stable results on a yearly basis, cca.13-15 billion USD per annum. Its revenue does not fluctuate but remains flat, it holds its positions in a mature market. The EBITDA is also steady while the company produces 2000-2200 m USD per annum, the EBITDA margin is 15%-16% of the revenue, this is flattish as well.
The company's return of equity ratio is huge, around 40%, but it dropped to 24,36% last year which is a warning sign.
Its dividend yield has been increasing from year to year, calculating the current share price (59,24 USD) its dividend yield is already above 4%.
As the company's D/E rate is decreasing gradually and its dividend is not correlating with the FCFE, we are going to use FCFF analysis.
| 2019 | 2020 | 2021 | 2022 | 2023 | |
|---|---|---|---|---|---|
| D/E | 5,62 | 5,18 | 4,61 | 3,75 | 3,58 |
| Div/FCFE | 0,52 | -3,57 | 0,81 | 0,8 | 1,53 |
Our calculation is based on the yield of an american 10-year state bond (4,1%) as a risk free return and the average equity risk premium (4,4%) in the US market during the last 80 years. The company's cost of debt comes from its AAA rating.
Using these data we get 5,17% for WACC. We expect that the company's EBIT is going to increase by 0,43% and will creep back to 2% after the 5th year. The return of invested capital is 7,82%.
As the earnings before interest and taxes has been increasing, it becomes visible on FCFF values, as well. Discounting these values with the weighted average cost of capital (WACC), we get the value of the company. It is now $26176,72 billions USD which means 76,54 USD per share calculating with 342 millions shares.Considering a margin of safety, our target price is 50,51 USD.
| 2018 | 2019 | 2020 | 2021 | 2022 | 2023E | 2024E | 2025E | 2026E | 2027E | TV | DCFV | V | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| EBIT (1-t) | 1358,2 | 1115,4 | 1402 | 1394,8 | 1301,7 | 1658 | 1665 | 1672,2 | 1679,4 | 1686,6 | |||
| FCFF | 1284 | 1054,5 | 1325,5 | 1318,7 | 1230,6 | 1567,5 | 1574,1 | 1580,9 | 1587,7 | 1594,5 | 1280,5 | ||
| DCF | 1490,33 | 1423,04 | 1358,77 | 1297,42 | 1238,83 | 31319,44 | 38127,86 | 26176,72 | |||||
| Pe= | 76,54 |
At the time of the analysis the share price is 59,24 USD, this is higher than our proposed price. According to our calculation, the current price is lower than the intrinsic value (76,54 USD vs 59,24 USD). In case of a further 10-15% share price drop our buy proposal comes into force (at the price of 50 USD). We propose accumulation at this price for longer term.
It is worth mentioning that the company is paying out a more than 4% dividend yield, which is going to increase in the future because the company has been increasing its dividend.
| 2019 | 2020 | 2021 | 2022 | 2023 | |
|---|---|---|---|---|---|
| ROIC | 8,45% | 6,6% | 8,44% | 8,19% | 7,5% |
| D/E | 5,62 | 5,18 | 4,61 | 3,75 | 3,58 |
| P/BV | 7,71 | 8,63 | 6,9 | 5,81 | 6,18 |
| Dividend | 2,2 | 2,26 | 2,28 | 2,31 | 2,34 |
| Dividend payout rate % (DIV/FCFE) | 0,52 | -3,57 | 0,811 | 0,8 | 1,53 |
| FCFE/shares outst | 4,23 | -0,63 | 2,81 | 2,88 | 1,529 |
| Cash to stockholders to FCFE | 0,5976 | -5,16 | 0,6833 | 0,8635 | 1,802 |
The return of invested capital is 8-8,5% a year, this is much higher than the WACC (5,17%) meaning that the company is value generator. The ROIC is higher than the cost of capital by 3%-3,5% every year. The D/E ratio has been decreasing which is a good sign. The leverage has also been decreasing, it goes under 3,5. The price-to-book ratio is quite high and stable, it remains around 6-8. The company needs to increase the shareholder equity level in the future in order to decrease this ratio sufficiently.
The company has increased its dividend year by year, this trend started more than 10 years ago.
Yearly FCFEs create decreasing room to pay more dividends, the FCFE/share generation is not enough to increase dividends in the near future. So, this is not a good sing from dividend increase perspective.
The cash to stockholders shows the proportion the company pays back to its share holders as dividend and buying own shares. The FCFE is not going to offer the coverage to pay out more dividend or not even to repurchase own shares in a long term.
If its results do not improve - sooner or later the dividend has to be reduced.
According to current share prices and other data:
| Stock | Price | Shouts | NI | P/E | BV | P/BV | Revenue | P/Sales | Ebitda | EV/Ebitda |
|---|---|---|---|---|---|---|---|---|---|---|
| Hershey | 209,03 | 204,69 | 1645 | 26,00994 | 3698,042 | 11,57 | 10860 | 3,939811 | 2558 | 16,72649 |
| General Mills | 66,15 | 590,6 | 2594 | 15,06098 | 10616,36 | 3,68 | 20090 | 1,944659 | 3913 | 9,984204 |
| Hormel Foods | 37,12 | 546,36 | 1000 | 20,28088 | 7711,362 | 2,63 | 12200 | 1,662367 | 1513 | 13,40442 |
| J.M. Smucker | 141,58 | 102,4 | -91 | -159,316 | 7037,763 | 2,06 | 8460 | 1,713687 | 1579 | 9,181629 |
| Conagra | 29,1 | 477,7 | 683 | 20,35296 | 8742,811 | 1,59 | 12280 | 1,132009 | 2243 | 6,197535 |
| K | 59,24 | 342 | 960 | 21,10425 | 3949,333 | 5,13 | 15315 | 1,322891 | 2113 | 9,588301 |
| average | 20,42619 | 4,306 | 2,078507 | 11,09885 | ||||||
| Pe= | 57,33668 | 49,72465 | 93,07699 | 68,57274 |
All indexes paint a mixed picture of the company: it is fairly priced on P/E but overpriced on P/BV ratios. The reason for this is the relativ ely high P/BV ratio (5,13). We are aware that the P/E ratio is high (3,58) and the company has less capital compared to its debt but this capital structure does not justify this high price. The relative analysis shows that theoretically, the values of Kellogg’s shares should be between 55 and 68 USD, so the current price level (59,24 USD) is correct. The company shares are not underpriced compared to its competitors.
*Companies with significantly low net income (Net Income – J.M. Smucker) were removed from our analysis in order to avoid their distorting effects on a 5 components competitor average. Therefore our calculation in this cases is restricted to 4 elements.
According to our calculations, Kellog’s is a mature company, its revenue, EBITDA and return on equity are stable and well balanced. It has paid out increasing dividends for more than 10 years and its dividend yield is above 4%.
The company leverage has been decreasing from 5,62 to 3,58 but this value is still high. If the company increase its capital, it would have a negative effect on dividend payment. The question is whether the company raises equity at the expense of dividends or keeps its annual dividend increase method.
According to the relative valuation and its financial results, Kellogg’s is a steady, reliable company. A significant deterioration in its results is not expected, only the dividend coverage is problematic especially if the company needs to increase its capital at the same time.
According to FCFF analysis, the fair price is 76,54 USD / share. Using a margin of safety, our target price is 50,51 USD. This price is supported by the competitor analysis, the company will be undervalued compared to its competitors at this price.
Our proposal is accumulation at the current price but at 50 USD level it will change to buy.
