Kellanova is a new Best Idea Long. The Kellogg Company will soon split WK Kellogg, its North American cereal business, from Kellanova, its global cereal, snacking, frozen foods, and emerging markets portfolio.
EVENT DETAILS:
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Our investment themes:
The spin-off of WK Kellogg will enhance the growth rate of the Kellanova business by removing low-growth businesses, realigning corporate strategy, and reinvesting in growth.
Spinning Off WK Kellogg Will Amplify Growth. The spin-off of WK Kellogg will optimize Kellanova for growth. The remaining portfolio grew 9% from 2019 through 2022, while the spin-off portfolio had little growth. Kellanova’s LT growth formula is 3-5% organic revenue growth, 5-7% EBIT growth, and 7-9% EPS growth. Operating margins are expected to exceed 15% over a medium-term duration, putting it into the top quintile among its food manufacturing peers.
Poorly Timed Spin-Off Or An Opportunity? Kellogg initially planned to spin off its cereal and plant-based units separately. However, the window closed on the plants-based unit with the declines in the sector best seen in Beyond Meat’s retreat. Is Kellanova’s plan to overweight its portfolio towards snacking poorly timed, and the market’s current concerns about GLP-1 drugs? Has the market assigned weaker food volumes to the weight loss drug instead of increasing price elasticity?
Will The Spin-Off Create Value? Will Kellanova be “a compelling opportunity for value creation, marked by a more growth-oriented portfolio, better profit margins, and faster sales and profit growth”? Or will industry headwinds of higher interest rates, tighter household budgets, increased price elasticity, and concerns over a structural headwind in unit demand lead to underperformance for the shares?
Our Black Book will go through in detail an analysis of the following:
- Spin-off details
- The post-spin outlook
- Margin outlook, input cost pressures, and pricing
- Opportunity in snacks
- M&A potential
- International opportunity
- Competitive landscape
- Demand risk from GLP-1 drugs
- Model variance
- Valuation breakdown
