Companies that rely heavily on breakfast foods for revenue and earnings would likely agree. Especially since breakfast eaten at home is “thriving, representing over 80% of all breakfast occasions last year,” according to Don Mulligan, CFO of General Mills, Inc. (NYSE:GIS) .
So how to invest in the lucrative breakfast business?
The General and cereal…
Cereal is one of the most recognizable breakfast foods in the United States. It is also a market that may have a good amount of room to expand internationally. According to Mulligan:
“We believe the global cereal category is poised for strong future growth. That’s because more than half of today’s cereal consumption happens in just four countries – the US and Canada, and the UK and Australia. But these markets represent only 6% of the world’s population. For the remaining 94% of consumers, cereal eating occasions per capita are still quite low so we see great opportunity ahead for our cereal business.”
Cereal is by far General Mills, Inc. (NYSE:GIS)’ main strength and is the most popular eaten-at-home breakfast domestically by far. The company’s brand portfolio of cereals includes: Cheerios, Cinnamon Toast Crunch, Chex, and Lucky Charms– just to name a few– and these brands account for over 20% of cereal category sales. And the cereal isn’t just for kids– as Mulligan surprisingly revealed that adults accounted for over half of Lucky Charms consumption.
While breakfast eaten at home is lucrative, it has also been on the decline among adults, according to Bloomberg. To better target adults (other than the ones wolfing down Lucky Charms every morning), General Mills, Inc. (NYSE:GIS) has launched a new product called BFAST, which is a line of nutritional shakes that, according to the company, boasts the “nutrition of a bowl of cereal & milk.”
Earnings have been trending upwards over the last 5 years, with revenue moving right along as well.
| P/E | Forward P/E | Dividend (Yield) | Beta | |
|---|---|---|---|---|
| GIS | 18.28 | 17.03 | 1.52 (3.10%) | 0.02 |
General Mills, Inc. (NYSE:GIS) looks fairly valued going forward, especially since earnings are expected to continue to rise, and the extra advantage of a high-yielding dividend helps, too.
Cereal king?
Another breakfast provider and cereal company is Kellogg Company (NYSE:K). Kellogg owns iconic cereal brands such as cornflakes. Kellogg is also the global leader in cereal– with sales topping over $14 billion in 2012. The company is also looking to expand into emerging markets more aggressively, recently focusing in on India with more affordable products such as small packs, as the head of Kellogg Company (NYSE:K) marketing in India stated that:
“Small packs are a big growth driver for us. It has expanded our reach and penetration across the country. Going forward, we expect that we will continue to evaluate opportunities and come up with products which are affordable… The ready-to-eat cereal market is around Rs 400 crore. It is growing at the rate of 20-30 per cent.”
20-30% growth is great for business, especially in a non-saturated market such as India with a huge population and growing middle class.
Kellogg Company (NYSE:K) also wants to expand even further into other breakfast offerings with their Kellogg To Go shakes. The company is also looking to get into other breakfast products, such as hot cereals. As of the company’s most recent quarter, the breakfast foods segment grew 1.6%.
While Kellogg Company (NYSE:K) has done a good job of increasing revenues, earnings haven’t followed suit, which is why the company looks so pricey in relation to trailing earnings. This is mostly due to one-time events, however, and the company’s expected return to its more normalized earnings power should give it a more reasonable valuation going forward:
| P/E | Forward P/E | Dividend (Yield) | Beta | |
|---|---|---|---|---|
| K | 25.37 | 15.52 | 1.76 (2.70%) | 0.44 |
