Kellogg: Placing Shares Under Review Ahead of Business Split

We’re placing Kellogg K under review as the firm spins off its North American cereal business, after which it will operate as a pure-play global snacking company under the name Kellanova. Starting Oct. 2, Kellanova will be listed on the New York Stock Exchange under the symbol K, while WK Kellogg will trade under the symbol KLG (both have been listed on a when-issued basis since Sept. 27). We will resume coverage of both share classes upon the commencement of independent trading.

Kellanova possesses a stout brand portfolio, as Pringles and Cheez-It each generate $1 billion or more in annual sales and Eggo, Pop-Tarts, and Rice Krispies Treats each chalk up sales of $500 million-$1 billion yearly. To support this standing, we think Kellanova will invest in new product launches (Kellogg spent around 1% of sales, or about $100 million, on R&D annually over the past three years) and marketing (spending around 5% of sales, or approximately $500 million, each year) to drive customer traffic into stores—bolstering the stickiness of its retailer relationships. This should unlock a runway for growth as the firm pursues category and geographic expansion (with 60% of sales from snacks and 30% from fast-growing emerging markets).

Conversely, WK Kellogg’s prospects will be exclusively tied to the North American cereal aisle, where growth has been lackluster at best partly due to the onslaught of competition from other breakfast alternatives. As such, we question whether WK Kellogg’s stand-alone retail relationships will sour against the shrinking relevance of the $10.4 billion domestic cereal aisle and the firm’s smaller scale following the spinoff (around $2.7 billion in sales). However, we see merit in WK’s plans to modernize its supply chain and manufacturing footprint (with $450 million to $500 million allocated to the effort over the next three years) as a means to bolster its profit prospects.