We came across a bullish thesis on WK Kellogg Co (KLG) on The Finance Corner’s Substack by Kostadin Ristovski, ACCA. In this article, we will summarize the bulls’ thesis on KLG. WK Kellogg Co (KLG)’s share was trading at $18.23 as of Dec 18th. KLG’s trailing and forward P/E were 23.37 and 9.60 respectively according to Yahoo Finance.
nyana-stoica-EV6C1LjH1Lk-unsplash
Kellogg’s journey began in the 1870s when a serendipitous accident led to the creation of what would become an iconic food manufacturing company. John Harvey Kellogg, who was managing the Battle Creek Sanitarium, and his brother, Will Keith Kellogg, were experimenting with wheat-berry dough when an unattended batch turned into delicate flakes. While John was hesitant to commercialize the product, W.K. saw its potential and founded the Battle Creek Toasted Corn Flake Company in 1906. After a legal dispute, W.K. took full control, and the company was rebranded as Kellogg Company in 1922. Over the years, Kellogg expanded its product line, including the successful launch of Pop-Tarts in 1964, which helped the company diversify and strengthen its market presence, especially among adult consumers.
However, the company’s fortunes took a turn with a major corporate restructuring in March 2023, resulting in the split of Kellogg into two separate entities: Kellanova and WK Kellogg. Kellanova, focused on global snacking, frozen breakfast, and plant-based foods, was acquired by Mars in August 2024 for $35.9 billion. WK Kellogg, now responsible for the North American cereal business, faces the challenge of revitalizing its operations amidst declining revenue and low margins. The company is focusing on stabilizing its topline, improving operating efficiency, and reducing debt. While it pays a steady dividend, significant growth is expected to be limited in the near term.
The cereals market is expected to grow modestly at 3% annually, with recovery taking time following the inflationary spike driven by COVID-19. The company’s revenue is projected to resume growth after market stabilization, with operating margins improving by 4%, aligning with the industry average. Given these assumptions, the company’s fair value is approximately $2 billion, or $23.9 per share, which is close to its current price of $20.7. The market’s expectations seem to be in line with either sub-3% growth or lower-than-expected margin improvement. Notably, the stock price has already improved from around $10 at the end of 2023.
The bull case for WK Kellogg hinges on a 5% or greater improvement in operating margins, reaccelerating growth driven by innovation, successful marketing campaigns, and a favorable raw materials market. In this scenario, the stock price could exceed $30, offering significant upside. On the other hand, the bear case presents risks such as loss of market share, ineffective marketing strategies, increased raw material prices, or competition from new entrants, which could push the stock price down to $10, reflecting a substantial downside. Despite the challenges, Kellogg’s strong brand recognition and loyal customer base provide a foundation for potential recovery, making it a compelling investment to watch.
WK Kellogg Co (KLG) is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 21 hedge fund portfolios held KLG at the end of the third quarter which was 25 in the previous quarter. While we acknowledge the risk and potential of KLG as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than KLG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.
Disclosure: None. This article was originally published at Insider Monkey.