Kellanova: Shares on Sale Despite Boasting Attractive Category and Geographic Reach

We’re initiating coverage of Kellanova (the standalone global snacking operation of the former Kellogg K business) with a $75 fair value estimate and a narrow moat rating. Kellanova possesses a stout portfolio, made up of a host of leading brands. Its top five—Pringles, Cheez-It, Eggo, Pop-Tarts, and Rice Krispies Treats—together account for around 50% of its sales mix.

From our vantage point, its outsize exposure to the attractive snacking enclave (around 60% of total sales) and faster-growing emerging markets (30%, far above the low-single-digit marks its domestic packaged food peers boast) should aid its long-term growth prospects. This underpins our 3% average annual top-line growth outlook (at the low end of management’s 3%-5% long-term aims but above the flat to 2% marks we think will emulate from other center-store aisles, like cereal and soup). In addition, as the firm builds out its scale abroad, while continuing to scour for inefficiencies across its mix, we think the operating margin can expand from the low teens to the midteens by fiscal 2027. However, the market seems skeptical, with shares trading at a 20% discount to our intrinsic valuation. At these levels, we think investors should indulge on shares.

We expect that the firm will continue to prioritize reinvesting in its brands (in both consumer-valued innovation and marketing support) to ensure it remains a valued partner for retailers and wins with consumers, affording a brand intangible asset. Its narrow moat is also buoyed by a cost edge resulting from its expansive global distribution network, with 50% of its sales generated outside of its home turf. However, given the dearth of switching costs in the food space and its brand concentration, we lack confidence that this edge can hold for the 20 years necessary to warrant a wide moat, thus our narrow moat rating.