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Stock Strategist

Strategy Change Not Enough to Make Us Scoop Up Kellogg

The move to a warehouse system from direct-store delivery is prudent, but the stock price isn’t compelling.

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In an industry where sales growth has proved elusive as efficiency efforts have taken top billing, packaged food companies are pursuing more drastic actions to ignite financial performance. However, we don’t think these efforts justify elevated valuations.

 Kellogg (K) intends to part ways with its direct-store delivery system and move entirely to a warehouse model, an action rebuffed by some global snack food peers as unwise. Management has suggested that an evolving retail landscape, including growing e-commerce penetration, amid intense competition made now the right time to pounce on this opportunity; this reasoning strikes us as sound. We believe this shift affords Kellogg the ability to more effectively reinvest behind its brand set and further entrench its relationships with retailers. But the shares still don’t represent a compelling proposition, trading at a modest discount to our fair value estimate. Instead, long-term investors looking to stock up in the space should consider narrow-moat  Blue Buffalo Pet Products (BUFF), which trades nearly 20% below our fair value estimate.

Erin Lash does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.