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Stock Strategist

Kellogg's Looking Grrreat

This wide-moat company trades well below our valuation and has a decent dividend yield.

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 Kellogg’s (K) share price slumped following third-quarter results. Organic sales growth was just 0.4%, as a 1.9% increase in volume was offset by a 1.5% hit from lower prices and unfavorable mix. The adjusted operating margin retreated 150 basis points to 13.6%. Not only is Kellogg battling the same commodity and logistics inflation as its peers, but also it saw a high-single-digit uptick in brand-building investments in the quarter, which we view as supporting its entrenched retail relationships despite the near-term erosion in profits.

Management attributed further cost pressures to the increase in sales of single-serve packs, which ultimately necessitated the use of third-party copackers, as it failed to maintain sufficient capacity to meet demand; this issue is likely to linger over the next couple of quarters. While this isn’t favorable as it pertains to the company’s margin profile, we view the outsize demand trajectory as indicative of Kellogg’s efforts to more effectively align its mix with consumer trends, and thus it is a modest positive.

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