Kellogg Company (K) Annual Valuation

Kellogg Company makes some great products, pays a stable dividend, and has a strong history of weathering economic storms.  It can be very easy for investors to jump on board after considering those facts, but it is critical for Intelligent Investors to take the time to do fundamental analysis in order to calculate an intrinsic value of a company.  Only through comparing the company’s intrinsic value to the market place can an investor truly get a sense of whether the company is a good investment.  In addition, a company must have strong financial statements and prove that it is stable enough for Intelligent Investors.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Kellogg Company fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Kellogg Company (Kellogg) is engaged in the manufacture and marketing of ready-to-eat cereal and convenience foods. The Company’s principal products are ready-to-eat cereals and convenience foods, such as cookies, crackers, savory snacks, toaster pastries, cereal bars, fruit-flavored snacks, frozen waffles and veggie foods. As of February 26, 2013, these products were manufactured by the Company in 18 countries and marketed in more than 180 countries. Kellogg also market cookies, crackers, crisps, and other convenience foods, under brands, such as Kellogg’s, Keebler, Cheez-It, Murray, Austin and Famous Amos, to supermarkets in the United States. The Company’s cereal products are generally marketed under the Kellogg’s name and are sold to the grocery trade through direct sales forces for resale to consumers. Effective June 1, 2012, Procter & Gamble Co announced that it has completed the sale of its Pringles business to Kellogg.

K data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7

1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
6. Moderate PEmg ratio – PEmg is less than 20 – PASS
7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
3. Earnings Stability – positive earnings per share for at least 5 years – PASS
4. Dividend Record – currently pays a dividend – PASS
5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

MG Value	$41.80
MG Opinion	Overvalued
Value Based on 3% Growth	$47.78
Value Based on 0% Growth	$28.01
Market Implied Growth Rate	4.38%
Net Current Asset Value (NCAV)	-$24.73
PEmg	17.27
Current Ratio	0.90
PB Ratio	7.27

Balance Sheet – 9/30/2013

Current Assets	$3,434,000,000
Current Liabilities	$3,834,000,000
Total Debt	$6,348,000,000
Total Assets	$15,220,000,000
Intangible Assets	$7,416,000,000
Total Liabilities	$12,385,000,000
Outstanding Shares	362,000,000

Earnings Per Share

2013 (estimate)	$3.77
2012	$2.67
2011	$3.38
2010	$3.30
2009	$3.16
2008	$2.98
2007	$2.76
2006	$2.51
2005	$2.36
2004	$2.14
2003	$1.92

Earnings Per Share – ModernGraham 

2013 (estimate)	$3.30
2012	$3.07
2011	$3.22
2010	$3.07
2009	$2.89
2008	$2.69

Dividend History

K Dividend data by YCharts

Conclusion:

Kellogg company has a very good history of raising its dividend, but alone isn’t enough to qualify the company for either the Defensive Investor or the Enterprising Investor.  The company doesn’t qualify for the Defensive Investor because of the low current ratio and the high PB ratio.  For the Enterprising Investor, the disqualifying factor is the high level of debt relative to the current assets.  While debt can be good for a company and there are plenty of companies that are very solid and financially strong with low current ratios, the ModernGraham approach requires a specific level of current ratio because it is a useful metric for eliminating some companies from the investment horizon.  Value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods, should seek other opportunities by reviewing a list of companies that pass the ModernGraham requirements.  From a valuation perspective, Kellogg looks slightly overvalued.  The company’s EPSmg (normalized earnings) have grown from $2.69 in 2008 to an estimated $3.30 for 2013, a strong level of growth that trails the market’s current implied estimate for growth.  The ModernGraham valuation model returns an intrinsic value estimate of $41.80 based on the historically demonstrated growth, which is below the current market price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Kellogg Company (K)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Kellogg Company (K) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.