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Kellogg stock forecast: Does splitting the business make sense?

By Rob Griffin

Edited by Alexandra Pankratyeva

17:01, 28 June 2022

Kellogg stock forecast: Does splitting the business make sense? Kellogg's sign on their Canada's head office building in Mississauga, an American multinational food-manufacturing company
Kellogg stock forecast: Does splitting the business make sense? Photo: JHVEPhoto / Shutterstock.com

US food group Kellogg (K) has announced plans to split into three public companies. The news has been met with a lukewarm reaction from the stock market.

The company, whose brands include Kellogg’s Corn Flakes and Rice Krispies, believes the move will give the individual businesses more freedom to focus on their strategic priorities.

But analysts warn there are still plenty of uncertainties related to the proposed structure and have questioned whether Kellogg’s financial prospects will be enhanced.

In this Kellogg stock forecast we look at the rationale behind the decision and whether or not it’s in the best interests of shareholders.

How have the shares performed?

The K stock price has risen 10% over the past year, from $64.41 to $70.96 at market close on 27 June 2022. Year-to-date (YTD), it has enjoyed a similar increase.

Although shares initially dipped 4% to $67.24 after the split announcement was made on 21 June, the K stock price has since recovered.

The stock is now trading at a similar level to where it was five years ago, although this period has seen it up to around the $74 level, as well as down to just above $50.

According to Morningstar, the company’s trailing returns for the past three years stood at 13.54%, compared to 7.34% for the industry, as of 27 June.

Kellogg (K) stock performance, 2017-2022

Kellogg stock forecast: Separating the businesses

In late June 2022, the company announced plans to split into three independent companies, spinning off its US, Canadian and Caribbean cereal and plant-based businesses. These operations collectively represented approximately 20% of net sales in 2021. 

The remaining business, which represented about 80% of net sales in 2021, will be focused on snacking, cereal and noodles and frozen breakfasts.

Steve Cahillane, the company’s chairman and chief executive, said it had been on a successful journey of transformation “to enhance performance and increase long-term shareowner value”.

“This has included re-shaping our portfolio, and today's announcement is the next step in that transformation,” he said. 

He insisted all the businesses had “significant standalone potential”, with an enhanced focus enabling them to better direct their resources toward their distinct strategic priorities.  

“In turn, each business is expected to create more value for all stakeholders, and each is well positioned to build a new era of innovation and growth,” he added.

Latest results

In early May 2022, Kellogg announced first quarter 2022 results and affirmed its full-year earnings guidance. 

The company achieved net sales of $3.67bn for the quarter ending 2 April 2022 – 2.4% ahead of the corresponding period in 2021.

Reported operating profit was up 9.5% to $517m, while reported diluted earnings per share increased 15% to $1.23.

Cahillane said he was pleased to report “another quarter of solid results”, with the year getting off to a better-than-expected start.

“The strength of our portfolio is evident, as we more than offset the sales and cost impact of supply recovery in North America cereal with sustained momentum in snacks growth around the world,” he said.

Cahillane also noted how the company had navigated through a “challenging supply environment”, delivering productivity and price realisation amidst decades-high cost inflation.

“Our strong start to the year, coupled with good sales momentum, allow us to affirm earnings guidance even as the outlook has worsened for cost inflation and incremental business disruptions, including impacts related to the war in Ukraine,” he added. “This is a testament to our strategy, our portfolio, and our people.”

Kellogg stock forecast 2022: How does the company view the outlook?

The company has raised its guidance for “organic-basis net sales growth” to approximately 4%, from its prior guidance of approximately 3%. 

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“This reflects momentum in its business, particularly snacks globally and noodles in Africa, as well as by higher price/mix growth required to cover incremental cost inflation in the economy,” it stated.

It also affirmed its guidance for adjusted-basis operating profit growth of 1-2% on a currency neutral basis, as well as adjusted basis earnings per share growth of the same amount. 

Its K stock forecast also affirmed guidance for net cash provided by operating activities of approximately $1.7bn to $1.8bn, with capital expenditure of approximately $0.6bn. 

“As a result, cash flow is still expected to be in the $1.1bn to $1.2bn range,” it added.

Kellogg share price forecast: Is it set to rise?

The stock was a ‘hold’, based on the views of 11 analysts compiled by MarketBeat at the time of writing on 28 June, although opinions varied quite considerably. 

While six analysts had ‘hold’ recommendations in place, three saw it as a ‘buy’, and two argued the company could be a ‘sell’.

The consensus view was that the K stock price could slip 1.2% to $70.10 over the coming year, from its closing price of $70.96 on 27 June 2022.

On 22 June, Deutsche Bank analysts lowered their K stock forecast from $74 to $72, while Citigroup boosted its prediction from $83 to $87. 

Kellogg (K) stock analyst ratings and price targets

According to the algorithmic forecasting of Wallet Investor, as of 28 June, the stock could be a “not so good long-term (one year) investment” that’s expected to increase 1.2% to $71.84 over the next 12 months.

The Kellogg stock forecast 2025 saw the price edging back up to $74.17, while the five year prediction to June 2027 anticipated further improvement to $76.42.
 

Kellogg stock predictions: What do the analysts think?

According to Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, the snacks business is now top of the menu in terms of the company’s growth strategy.

“By splitting the company into three separate entities, with the cereals and plant based businesses going it alone, Kellogg’s clearly has its ambitions firmly trained on its global snacks business, which already makes up the majority of its revenues,” she told Capital.com.

This is seen as having much greater potential, she pointed out, given increased habits around the world to eat food on the go. 

“However, there has been a lukewarm reaction to the plans given there is still plenty of uncertainty ahead about the new structure,” she said. “The new management team line ups have yet to be revealed and the names of the new companies haven’t been decided.”

This obviously creates a lot of questions. “Although the overall valuation could lift once the deal has been completed, there is also likely to be significant costs involved in splitting the company,” she added.

In a recent Kellogg stock forecast, Erin Lash, senior director at Morningstar, questioned the rationale behind the decision to split the business.

“Despite the increased focus management claims this affords, we fail to see how this strategic action enhances its competitive position or financial prospects, given the reduced scale and added administrative costs that are likely to ensue,” she wrote. “In our view, the motivation leans more toward unlocking a higher multiple for the faster-growing snack business once it’s unencumbered by the more mature North American cereal brands.”

Lash’s K stock forecast saw the fair value estimate for the company reduced to $82 a share from $88, based on a sum-of-the-parts valuation to account for the breakup.

Aside from the pending split, which is expected to happen by the end of 2023, she highlighted how the underlying business still faces headwinds.

“Cost pressures (related to raw materials, labour, packaging, and transportation) are ravaging firms across industries, and Kellogg is no exception,” she said.

When looking for Kellogg (K) stock predictions, it’s important to bear in mind that analysts’ forecasts and algorithm-based price targets can be wrong. Projections are based on making fundamental and technical studies of the K stock’s historical price pattern.  Past performance does not guarantee future results.

It is essential to do your own research. Always remember that your decision to trade depends on your attitude to risk, your expertise in the market, the spread of your investment portfolio and how comfortable you feel about losing money. You should never trade money that you cannot afford to lose.

FAQs

Is Kellogg a good stock to buy?

Whether K stock is a good investment for you will depend on your own investment objectives and the research you have carried out on the stock. Remember, it’s very important to form your own opinion of a company’s prospects and its likelihood of achieving analysts’ targets. You should never trade money that you cannot afford to lose.

Will Kellogg stock go up or down?

The consensus forecast from analysts covering the Kellogg (K) stock, as of 27 June, was that the price could slip 1.2% to $70.10 over the coming year, down from its closing price of $70.96 on 27 June 2022, data compiled by MarketBeat showed.

It is important to remember that analysts and forecasts can be wrong. They should not be used as substitutes for your own research. You’ll need to carry out your own analysis on the stock’s prospects..

Should I invest in Kellogg stock?

This depends on your view of the company. If you believe splitting into three businesses will enhance returns then you might consider Kellogg (K) stock as a potential trading option. You will need to draw your own conclusions on how Kellogg is likely to perform over the coming years.

It is essential to do your own research. Always remember that your decision to trade depends on your attitude to risk, your expertise in the market, the spread of your investment portfolio and how comfortable you feel about losing money. You should never trade money that you cannot afford to lose.

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