Kellogg Company Annual Valuation – 2015 $K

500px-Kellogg's.svgBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  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 or by reviewing the 5 Most Undervalued Companies for the Defensive Investor – February 2015.  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 (K) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Kellogg Company 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. The Company’s segments include U.S. Morning Foods; U.S. Snacks; U.S. Specialty; North America Other; Europe; Latin America, and Asia Pacific. The U.S. Morning Foods segment includes cereal, toaster pastries, and health and wellness business bars, and beverages; U.S. Snacks includes cookies, crackers, cereal bars, savory snacks and fruit-flavored snacks; U.S. Specialty includes the food service and Girl Scouts business, and North America Other includes the U.S. Frozen and Canada operating segments. The three remaining segments are based on geographic location.

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7

  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 - FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 - FAIL
  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 = 2/5

  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 - FAIL

Valuation Summary

Key Data:

Recent Price $63.20
MG Value $21.56
MG Opinion Overvalued
Value Based on 3% Growth $43.19
Value Based on 0% Growth $25.32
Market Implied Growth Rate 6.36%
Net Current Asset Value (NCAV) -$25.36
PEmg 21.22
Current Ratio 0.77
PB Ratio 8.04

Balance Sheet – December 2014

Current Assets $3,334,000,000
Current Liabilities $4,358,000,000
Total Debt $5,935,000,000
Total Assets $15,126,000,000
Intangible Assets $7,266,000,000
Total Liabilities $12,337,000,000
Outstanding Shares 355,000,000

Earnings Per Share

2014 $1.75
2013 $4.94
2012 $2.67
2011 $2.38
2010 $3.40
2009 $3.16
2008 $2.99
2007 $2.76
2006 $2.51
2005 $2.36
2004 $2.14

Earnings Per Share – ModernGraham

2014 $2.98
2013 $3.50
2012 $2.83
2011 $2.91
2010 $3.11
2009 $2.89

Dividend History

Conclusion:

Kellogg Company is not suitable for the Enterprising Investor or for the Defensive Investor.  The Defensive Investor is concerned by the low current ratio, insufficient earnings growth over the last ten years, as well as the high PEmg and PB ratios.  The Enterprising Investor is concerned by the level of debt relative to the current assets along with the lack of earnings growth over the last five years.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities at this time.  From a valuation side of things, the company appears to be overvalued after seeing its EPSmg (normalized earnings) drop from $3.11 in 2010 to only $2.98 for 2014.  This level of demonstrated growth does not support the market’s implied estimate of 6.36% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value below the price.

Be sure to check out previous ModernGraham valuations of Kellogg Company (K) for greater perspective!

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.

Disclaimer:  The author did not hold a position in Kellogg Company (K) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.


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