NEW YORK — Research and analytics firm Credit Suisse on Nov. 23 upgraded its outlook for The Kellogg Co. to “outperform” and raised its target price to $76 from $72 following the Battle Creek, Mich.-based company’s investor day last week. Robert Moskow, research analyst with Credit Suisse, noted in his report that Kellogg now represents “the best risk-reward in our space.”
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| Robert Moskow, research analyst with Credit Suisse |
“The savings from restructuring and Z.B.B. (zero-based budgeting) provide unique visibility into 7% to 9% e.p.s. growth, and management exhibited a new level of urgency that we have not seen in many years, which could be a function of outside pressure or merely impatience on the part of the board,” Mr. Moskow said. “In addition, recent tracking data has showed consistent sequential improvements in Kellogg’s cereal business and in the cereal category as a whole. We expect Kellogg’s cereal business (45% of sales) to return to growth in 2016 behind the revitalization of the Kashi and Special K brands.”
Mr. Moskow said Credit Suisse has been impressed with the significant changes that John Bryant, Kellogg’s chief executive officer, put in place, especially for what he described is “a traditionally slow and sleepy company.”
Among the changes were the installation of new management from outside the company and the return of the Kashi business to its original headquarters in Solana, Calif.
“Importantly, we sensed a shift away from what had become an overly dogmatic approach toward using innovation to improve gross margin and mix,” Mr. Moskow said. “Instead, Kellogg is making an enormous commitment to bring new millennial consumers to the franchise by improving the quality of its food. This includes adding more nuts and berries to existing lines, introducing mueslis and granolas, and removing artificial colors and flavors. Management told us that the benefits from SG&A leverage, including the implementation of zero-based budgeting across its business geographically gives it the cushion it needs to more than offset these important investments.”
Mr. Moskow added the research firm believes heightened pressure on management creates a win-win scenario for shareholders.
“We might be jumping to conclusions, but we see evidence that management is feeling more pressure than normal to turn around the business, either from an activist investor or just from a dissatisfied board of directors,” he said. “For example, it made an out-of-character decision to give its 2016 guidance early during its 2Q earnings call and it pulled together its analyst day at the last minute. Our sense is that the company has reached a crossroads where management either achieves its targets over the next two years or the board chooses to pursue a more aggressive avenue for shareholder creation. Kraft Heinz would be ready and eager to buy the business if the board opened the door. Recent ownership stakes taken by activist investor JANA and Soros Fund Management indicate a growing (albeit early) view that Kellogg may become an event-driven story.”
