Kellogg Serves Up a Helping of Improved Sales in Q3
We think this performance is a testament to the strategic course it has been trekking over a multiyear horizon--anchored in increasing investments in its capabilities and brands.
Even as it lapped impressive sales in the year-ago period, Kellogg’s K third-quarter sales (up 5.1% on an organic basis, in line with the growth posted over the same quarter in 2019) were sound, reflecting a 1.4% increase in volumes and a 3.7% benefit from higher prices. We think this performance is a testament to the strategic course it has been trekking over a multiyear horizon--anchored in increasing investments in its capabilities and brands.
Despite these solid top-line gains, cost pressures (spanning raw materials, labor, transportation, and packaging) and a strained global supply chain ate into profits. This manifested in a 250-basis-point contraction in adjusted gross margins to 32.2%. While these challenges certainly aren’t unique to Kellogg, the firm is also contending with supply chain constraints stemming from a fire at one of its domestic cereal plants and a labor strike for the past month, similar to the walkouts that have plagued others including wide-moats PepsiCo and Mondelez. These headwinds could linger over the next quarter or two, but we’re encouraged that management doesn’t seem to be siphoning off investments (qualitatively referenced) to offset the hit to margins. We view spending behind consumer-valued innovation and marketing support as key to entrenching its brands with consumers and retail partners.
In light of its year-to-date results, management bumped up its full-year sales growth expectations to 2%-3% (from flat to 1% growth prior) but held the line on its 1%-2% growth outlook for adjusted EPS. We’ll likely fine-tune our near-term revenue forecast but see little to warrant altering our long-term projections (low-single-digit organic sales growth and high-teens operating margins). And our $83 fair value estimate should move up by a low-single-digit percentage (due to time value); with shares trading at a 30% discount and offering a 4% dividend yield, we think investors would be wise to stock up on this wide-moat name.
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