Kellanova: Stock of the Week

Why Kellogg’s spinoff snack stock is trading at a sweet discount.

Andrew Willis 23 October, 2023 | 4:51AM
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Key Takeaways for Kellanova Stock:

  • Kellogg’s snack business split makes for an appealing bet on the fast-growing global snack business as Kellanova trades at a significant discount to fair value estimates.
  • The snack segment offers better exposure to emerging market sales, which Kellanova can focus on, while Kellogg manages a mature North American cereal business.
  • Kellanova now commands an economic moat thanks to its brand portfolio and a sophisticated global distribution network that fosters mutually beneficial relationships with suppliers.

 

Andrew Willis: From Pringles and Cheez-its to Eggos, Pop-Tarts, and Rice Krispies, your favourite snacks now come in a convenient stock form. In fact, those five brands just mentioned account for 50% of the sales mix for the new Kellanova stock K.

Sector director Erin Lash thinks investors should indulge in shares for the newly formed Kellogg KLG spinoff as it trades at a healthy discount to our fair values. Junk foods, for better or worse, are a fast-growing segment with more of a global appeal. In contrast to the slower-growing cereals segment which has sales in the low-single digits in emerging markets, thirty percent of snack sales come from abroad. We think the split with Kellogg allows Kellanova to be less encumbered by mature North American cereal brands.

And for all the efforts that consumers make around diet and weight loss, snack brands still manage to maintain valuable shelf space. Pringles sales, for example, popped to $2.8 billion U.S. dollars in annual sales and the product now commands 13% of the potato chip aisle – and they aren’t even technically potato chips!... That’s brand power for you, and the right combination of salty and sweet coming together to make an economic moat, which the remaining Kellogg cereal business does not have.

Big Brand Snack Stocks Sell Better

Kellanova’s competitive edge is also rooted in an expansive global supply chain to get those snacks in stores abroad. Becoming entrenched in a retailer’s supply chain creates a virtuous cycle where the seller and manufacturer mutually benefit. For all the advantages, however, investors should keep in mind that Kellanova still shares with Kellogg a risk from rising prices among raw materials – especially when it comes to sugar and salt.

For Morningstar, I’m Andrew Willis.

 

bulls Kellanova Bulls Say

  • Netflix's internal recommendation software and large subscriber base give the company an edge when deciding which content to acquire in future years.
  • Netflix has built a substantial content library that will benefit the firm over the long term.
  • International expansion offers attractive markets for adding subscribers.

bears Kellanova Bears Say

  • The firm continues to burn billions of dollars of cash to create its original content with no end in sight.
  • The level of competition in the U.S. and internationally is increasing and will continue to do so in the near future.
  • The need for increased content and marketing spend outside of the U.S. will limit the rate of margin expansion for the international segment.

 

Editor's Note: All images are courtesy of Unsplash.com and AP Images. 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Kellanova Co61.04 USD-0.47Rating
WK Kellogg Co19.51 USD-2.50Rating

About Author

Andrew Willis

Andrew Willis  is Senior Editor at Morningstar Canada. He previously produced content for Fidelity Investments and finance industry events for Euromoney Institutional Investor and has written in the past for Thomson Reuters and CNN. Follow him on Twitter @Andrew_M_Willis.

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