Stock Analysis & Ideas

Kellogg Stock Rallies on Spin-Off Plans; What’s Next?

Story Highlights

A three-for-one sale in the cereal aisle is cause for some celebration. A three-for-one sale at Kellogg itself may be in the offing soon, and it’s no less reason to get excited.

Breakfast tables worldwide have long been graced with Kellogg (K) cereal products. The food maker is widely known and well respected. Its latest plans sent the stock climbing in Tuesday’s premarket trading—up over 8.1% at one point—and the company held on to some of those gains going into Tuesday’s trading session. It is currently up 2.8% on the day.

Given the current macroeconomic climate, it’s not hard to be bullish on a food company. Kellogg’s big plan is likely to drive up value in the short term and position the company well, going forward.

The last 12 months for Kellogg stock were fairly stable until recent events sent the stock spiking. Kellogg spent most of 2021’s latter half around $61, with brief exceptions, before launching last month to briefly challenge $75 per share. Kellogg retraced its steps recently, though, returning to around $70 per share.

The latest news, meanwhile, will see the company split into three parts. One company will focus wholly on the U.S. market, while a second will take on international cereal and snack markets. The third will be known as a “pure-play plant-based foods company.”

Names for the spin-off companies haven’t been reached yet. Meanwhile, the whole process is expected to conclude by the end of 2023.

Wall Street’s Take

Turning to Wall Street, Kellogg has a Hold consensus rating. That’s based on two Buys, eight Holds, and three Sells assigned in the past three months. The average Kellogg price target of $71.67 implies 3.3% upside potential.

Analyst price targets range from a low of $62 per share to a high of $83 per share.

Investor Sentiment Looks Increasingly Bright

Analysts are of two minds about Kellogg stock, but that’s not the same everywhere. Right now, Kellogg has a ‘Perfect 10’ Smart Score on TipRanks, the highest level of “outperform.” That makes it the most likely that the company will ultimately do better than the broader market.

In support of this, hedge fund involvement is on the rise, based on the results of the TipRanks 13-F Tracker. Hedge funds bolstered their holdings by 195,900 shares last quarter. This represents the second consecutive quarter that hedge funds have increased their position in Kellogg stock.

Insider trading at Kellogg is a different story. Recently, insiders at Kellogg have ramped up their buying, with Buy transactions leading Sell transactions by 11 to five.

It’s something of a different story over the full year, however, with Sell transactions narrowly leading Buy transactions 27 to 22. That suggests something has recently changed that put insiders in a much more eager mood to make acquisitions rather than divest.

Retail investors—at least, those who hold portfolios on TipRanks—are eager for more Kellogg. TipRanks portfolios that hold Kellogg stock were up 0.5% in the last seven days and up 1.7% in the last 30 days. Regular investors are clearly eager to buy in on Kellogg.

Finally, there’s Kellogg’s dividend history to consider. The company has maintained a dividend throughout even the pandemic, and back in May 2021, it raised the dividend by one cent.

There was no dividend hike with May 2022’s arrival, however. The latest news suggests that Kellogg is uncertain about how it would split the dividend among the three new companies.

Three-for-One Sale? Quite Possibly.

The obvious argument applies here. By splitting itself into three companies, Kellogg can better focus on which part of the market its products represent. The U.S. cereal market can focus on developing new products for cereals in the United States. The snack division doesn’t have to concern itself with new ways to use Rice Krispies.

That bodes well for investors overall. It’s true that sometimes businesses can get too big for their own good. They’re no longer able to rapidly pivot to take advantage of market trends. Instead, much like an 18-wheeler with a full trailer, they back and fill and eventually point themselves in the right direction.

By the time that process concludes, however, the opportunity may already have passed. Kellogg’s move here will help ensure that it can better act on potential opportunities in its now-various markets.

Better yet, there’s solid support for such a move from the macroeconomic environment. Anyone who’s bought groceries lately knows that prices are on the rise and don’t show much sign of stopping. That’s going to give these three new companies some extra room to run, especially if they can offer more in the way of inexpensive food.

Perhaps best of all, there’s a real possibility that buying a share of Kellogg today will end up in a share of three different companies in the future. There hasn’t been much news on how the companies will be valued at their trifurcation. However, it’s a fairly safe bet that owning one share of Kellogg today will net investors at least some position in each of the three spin-off companies to come.

This will offer up a significant opportunity; the three markets actually represent different strata of investments in their own right. Analysts consider the snacks market a growth market. The North American cereal market, meanwhile, is stable and slower-growing.

There’s also a significant potential for volatility ahead. Will investors sell off their shares in the cereal company to buy in on the snack company? Will investors sell off both to pursue the plant-based play instead? There could be some very wild price movements in all three of these future companies as investors rebalance their portfolios accordingly.

Concluding Views

Right now, Kellogg is a fairly secure play. With multiple divisions fueling its operations and food remaining a recession-proof operation—no one really stops needing food—it’s a solid investment going into the likely recession ahead.

It’s also likely to be an extremely volatile investment after the spin-offs take place. The fact that each division will be focusing on its own substratum of the market will also prompt volatility.

As noted previously, snacks are bigger growth than breakfast cereals, which aren’t likely to see explosive growth any time soon. Those who want breakfast cereals can easily get them.

Instead of owning shares of one big company with many divisions to drive it, Kellogg will soon be three smaller companies with potentially a lot of growth ahead.

Investors’ risk tolerance is about to get a serious gut-check. However, for those who hang in there, this could be the start of something very big. That’s why I’m bullish on Kellogg overall; buying one share today could lead to owning shares in three big companies later on.

Disclosure

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