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
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:
Hershey has experienced a similar upside move, so there is indeed a real pattern with these companies. Just look at how flat and stable the charts are until a few months ago! Anyways, Hershey makes a variety of chocolate and other grocery products, and is projected to grow at a forward rate of 10% annually, the highest of the group. Along with this growth however, comes a very high valuation of 25 times forward earnings, which I feel is simply too expensive. Analysts seem to agree, as the average analysts’ price target on The Hershey Company (NYSE:HSY) is over 6% lower than the stock’s current price.
Hershey 1-Year Performance
Conclusion
There is definitely an influx of optimism surrounding the major food producers, and I feel that the charts are actually starting to look bubble-like. While these companies all have great strategies for growth, pay nice dividends, and have been very stable and rewarding for past investors, are they really in 30% better shape than they were a few months ago? I think not.
The article There Is Something Going On With The Food Producers originally appeared on Fool.com.
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