Kellogg Company (K), General Mills, Inc. (GIS): There Is Something Going On With The Food Producers

A leading producer of ready-to-eat cereal, snacks, and more, Kellogg Company (NYSE:K) has experienced some unusual price activity lately. For most of the past decade, the stock has traded relatively flat. It reacted to the overall climate of the market, but hadn’t gone below $46 or above $58 since the market lows of 2009. Recently, however, Kellogg has been on a tear, climbing rapidly almost in a linear fashion since last September. Since then, the stock has gained more than 30%, an unprecedented move in such a short period of time considering how “safe” and “stable” Kellogg is generally considered to be. My question is: with Kellogg making all-time highs seemingly every day recently, is it too late to get in or will the trend continue?

About Kellogg Co (NYSE:K).

Since 1906, Kellogg Company (NYSE:K) has been a leader in the cereal and snack categories, with such well-known brands as Pop-Tarts, Eggo, Nutri-grain, Cheez-It, and Famous Amos, as well as the recently acquired Pringles brand. Kellogg has become a truly international company, with 37% of sales coming from international markets.

One thing that I don’t care for when it comes to Kellogg is the fact that 45% of the company’s U.S. sales come from their five largest customers, with a full 20% coming from Wal-Mart Stores, Inc. (NYSE:WMT). So, if Wal-Mart begins having trouble (unlikely), it could cause a ripple effect with Kellogg and all of the other consumer staples companies who have a similar reliance on Wal-Mart for business.

Valuation and Projections

After all of the recent gains, Kellogg Company (NYSE:K) trades at a historically lofty valuation of 17.2 times forward earnings. However, the growth rate that analysts are projecting seems to justify the P/E. Kellogg is projected to earn $3.86 this year, rising to $4.17 and $4.54 in 2014 and 2015, respectively. This translates to average forward earnings growth of 8% over the next three years, not bad for such a safe and stable company. Also worthy of consideration is the 2.66% dividend yield that Kellogg pays, and has been raised every year for the past decade.

Peers

Whenever a company like Kellogg has an unusual move to the upside, my first instinct is to take a look at its peers to see if there has been a similar move. General Mills, Inc. (NYSE:GIS) and The Hershey Company (NYSE:HSY) are two similarly sized food companies, so let’s take a quick look.

General Mills produces cereals such as Cheerios and Lucky Charms, as well as other well-known food brands such as Betty Crocker, Pillsbury, and Haagen-Dazs. Surprisingly enough, they have also had a steep upside move, even more so than Kellogg. General Mills trades at a slightly higher 18.7 times forward earnings, with a similar projected growth rate as Kellogg Company (NYSE:K). Income investors may prefer General Mills, Inc. (NYSE:GIS), due to the company’s slightly higher yield of 3.02%.

General Mills 1-Year Performance: