Turnaround Investing Blog

George Putnam, one of the country's leading turnaround and distressed investing professionals, shares his timely insight on the economy and turnaround investing opportunities.

Food, Beverage, & Tobacco / Stocks That Pay Dividends

Value Investing Analysis: Should Kellogg Shareholders Have Post Holdings Envy?

Overview

  • Post Holdings shares have vastly outperformed Kellogg’s and the S&P500 over the past three years.
  • Similarly, Post’s crisp revenue and earnings growth has left Kellogg’s looking soggy.
  • However, the two companies’ prospects may diverge again, but in a different direction.
  • In this note, we analyze Post Holdings’ recipe for its strong returns, assess what has held Kellogg’s back and explore Kellogg’s outlook compared to Post Holdings’ to answer the question: Should Kellogg’s shareholders have Post Holdings envy?

Long-term investors in breakfast cereal producer Post Holdings (POST) have had done well over the last three years. POST shares have surged 121%, far better than the S&P 500 which has gained only 28%. The same can’t be said for shareholders of breakfast cereal producer Kellogg’s (K), whose stock price has actually declined about 2% over the same period.

The past 12 months were even more grim for Kellogg’s, as its share price has fallen nearly 17%, while Post produced a 9% gain. Both were easily left behind by the FAANG-driven S&P 500 which gained over 21%.

Kellogg’s generous dividend payments, now providing a 3.5% yield, modestly sweetened the bitter taste. Nevertheless, the recent times haven’t been bountiful for its shareholders.

Even after Kellogg’s strong stock price bounce (+6.2%) following its 3Q17 earnings report, the market is placing a 20% premium on Post Holdings valuation relative to Kellogg’s. Post trades at 13.6x this year’s EBITDA, or earnings before interest, taxes, depreciation and amortization (a measure of cash operating earnings), while Kellogg’s trades at a weaker 11.3x EBITDA. For investors focusing on price/earnings valuations, the difference is stark: the 30.8x multiple for Post is twice the below-market multiple of 15.7x for Kellogg’s.

One ingredient in Post Holding’s strong returns is not its breakfast cereal business, which is stuck in the same slowly declining industry as Kellogg’s cereal business, as consumers move toward more healthy alternatives. Both companies have been busy diversifying away from cereal, with Post’s cereal segment comprising only 33% of revenues and Kellogg’s at about 50%.

Neither is Post’s recent overall revenue growth--which has declined 0.6% year-to-date, although this outpaces Kellogg’s soggy 2.0% year-to-date revenue decline (through 3Q17).

The recipe also doesn’t include Post’s recent EBITDA growth. Year-to-date, this has declined 1.6%. Depending on how it is measured, Kellogg’s year-to-date EBITDA growth is either a little better or much better. Actual EBITDA has declined by 1.0%. But, measuring underlying growth, which excludes costs related to a major restructuring which will wrap up in a year or so, EBITDA has grown by an encouraging 3.5%.

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This Forbes write-up follows up on the recent Top Stock Tips report--naming The Turnaround Letter's Crocs recommendation the top performer of 2017: With 90% gains, CROX beat out 100 other investment ideas included in the report; and the stock continues to have value investing appeal, according to Putnam.

 

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