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This article was written exclusively for Investing.com

Back in 2019, there was an intriguing bull case for Kellogg (NYSE:) stock. The stock had been struggling for some time, gaining just 7% total between 2010 and 2018. Total returns including dividends of 40% were less than one-fourth that of the .

The problem seemed obvious: Kellogg’s business simply wasn’t that attractive. Cereal sales were in a multi-year decline. Kellogg mimicked other old-line food manufacturers like Campbell Soup (NYSE:) and JM Smucker (NYSE:) by using acquisitions to move into more attractive categories: its most notable deal on that front was the 2012 purchase of Pringles potato chips. But like Campbell and Smucker, the acquisition activity did little to change investor perception.

But Kellogg had a secret weapon, as it were: vegan food brand MorningStar Farms. In early May 2019, Beyond Meat (NASDAQ:) went public. The was priced at $25, opened at $45, and hit $70 on its first day. By the summer, BYND (albeit briefly) had touched $200.

As one analyst noted at the time, using BYND as a comparison, there was an argument that MorningStar could be worth as much as $10 billion. Kellogg in mid-2019 had a market capitalization of $18 billion. And so a spin-off of MorningStar seemed a smart way to create shareholder value at a time when vegan and ‘faux’ meat products were all the rage.

Kellogg indeed did decide to spin off MorningStar — but in 2022. The spin now is receiving a very different reception.

The Kellogg Split

Kellogg is spinning off its plant-based foods company as part of a three-way split. The tentatively named PlantCo will center on MorningStar. The well-known cereal brands will comprise “North America Cereal Co.” And the remaining business, referred to as “Global Snacking,” will include brands like Pringles, Pop-Tarts, and Eggo waffles, along with international sales of cereal and noodles.

On its face, the split perhaps makes some sense. From a business standpoint, management argued in a conference call about the transaction that each business will be able to better prioritize its resources. The domestic cereal business will focus on cash flow, and Global Snacking on profitable growth. MorningStar will look to expand its market share (though that business could be sold instead).

But there are two big problems here that undercut the idea that the Kellogg breakup is transformative.

Too Late

The first is that the deal simply looks to be too late. While a $10-billion valuation for MorningStar in 2019 might have been excessive — BYND crashed from its highs quickly, though it still ended the year up about 200% from its IPO price — there was an opportunity then to capitalize on investor optimism toward plant-based foods. That optimism is close to gone.

BYND now trades below its IPO price. Even after a long fall, that stock looks shaky: it is in fact one of the most heavily-shorted issues in the entire market.

At its current price, Beyond Meat has a market capitalization of $1.55 billion, a little over 3x revenue. Kellogg disclosed that its plant-based business in 2021 generated sales of $340 million, and EBITDA (earnings before interest, taxes, depreciation and amortization) of $50 million. Sales grew about 9% in 2021.

It’s difficult to see that profile garnering much more than a $1 billion valuation: roughly 3x sales and about 20x EBITDA. Again, three years ago it was possible to credibly argue that MorningStar might be worth as much as ten times that amount.

Too Little

The cereal business, too, doesn’t look all that valuable. The brands are famous, but the business is not particularly large at this point: it generated $2.4 billion in sales last year, with EBITDA of $250 million.

That, too, is a profile that suggests a relatively modest valuation: something in the range of $2 billion to $3 billion (8-12x EBITDA). Even that may be optimistic: investors are not going to pay up for a business that serves a long-declining category.

Neither valuation really moves the needle against Kellogg’s current $24 billion market capitalization. Meanwhile, all three businesses also are going to incur more cost: chief financial officer Amit Banati admitted on the conference call that “on an ongoing basis, there will be some dis-synergies.” In other words, it’s more expensive to run the three businesses separately rather than together.

So it’s hard to understand the logic here. Investors who own Kellogg now already are owning it for the brands in the Global Snacking business. That’s where most of the value is now; given a likely $4 billion or so combined valuation for the spun-off operations, that’s where most of the value will be post-split as well.

The breakup, thus, doesn’t seem to move the needle. It adds ongoing cost, and no small amount of upfront expense as well. But there’s no offsetting value-add, no real argument that Kellogg is worth more broken up, or that its value will suddenly be more apparent to investors.

Indeed, the market mostly has shrugged at Kellogg’s plans — and with good reason. The split isn’t creating value, and it isn’t highlighting value. Not enough has changed.

Disclaimer: As of this writing, Vince Martin has no positions in any securities mentioned.

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