Unscrambling Monday's Egg

Kellogg's

Running Kellogg's through the Chicks' Dozen
by Chick Megan

Pressing my face against the cold tile of my bathroom floor, I reached up and grabbed the toilet seat to raise myself up. "Oh my God," I thought "The toilet seat! How disgusting!" I quickly let go and closed my eyes, hoping the visions of toilet-bowl usage would soon leave my brain. When the heavy salivating began to subside, I crawled to the door and pulled it open. There were my daughters, bed head and all, looking down at me wondering where I'd put their mother. I growled and dragged myself to bed and in some language or another managed to tell my kids they'd be fending for themselves... again. My three year old would need to fill her own sippy and my five year old would need to dress herself for school. As she later kissed me goodbye, sporting leggings that were too short and a shirt I was sure I'd tossed, I began to cry. Why does being pregnant have to be such a miserable experience? Where's the glow? Who are those people who love it so much? Do they even exist? And darnit, where's my Pop-tart??

After safely ingesting my Kelloggs (NYSE:K) Low-Fat Frosted Strawberry Pop-Tart, I decided to investigate the soother of my stomach.

1. Buy What You Know  Who doesn't know about Special K, Frosted Flakes, Apple Jacks, Rice Crispies or Raisin Bran? How about Nutri-Grain bars? This is something I've known for as long as I can remember. Didn't we all grow up with Tony the Tiger?

2. Keep it Simple Sweet-Stuff  Hmmmm... cereal for breakfast? As sure as the sky is up, cereal is simplistic. After all, breakfast is the most important meal of the day!

3. Industry  Food Processing, Sector, Consumer Non-Cyclical. Food is something everyone (especially a pregnant woman) understands.

4. Leader In Its Field  Kellogg's is the leading producer of cereal and convenience foods manufacturing in 20 countries and marketed in over 160 countries. Their Gross Margins have beaten the Industry, Sector, and S&P 500 for four consecutive quarters. Also, Kellogg's is listed as number 8 out of the Top 50 companies in their industry (marketguide.com).

5. Repeat Profitability  No question here, folks. With big name cereals like Raisin Bran and Rice Krispies, their brand recognition is enormous. Consumers know it and like it and will continue to put it in their cupboards!

NOTE: The following numbers were found at www.marketguide.com.

6. Gross Margins

(Sales - Cost of Goods Sold) / Sales

(1556 - 764.9) / 1556 = 51%

Theyyyyyy're Great!

7. Net Margins

Net Income / Sales

93.2 / 1556 = 5.9%

We prefer something around 8%. They're just a little shy here.

8. Cash vs. Long Term Debt

Cash* / Long Term Debt

204.4 / 709.2 = .28 (We want greater than 1.0 

Woops, we want more cash than debt.

*Plus marketable securities

9. Flow Ratio

(Current Assets - Cash*) / (Current Liabilities - Short Term Debt)

1402.4 / 2007.4 = .69

*Plus marketable securities

Don't need preservatives in their cereal, Chicky, they run a tight ship!

10. Increasing Growth

(12/31/00 Sales - 9/30/00 Sales) / 12/31/00 Sales =

(1556 - 1845.7) / 1845.7 = -.15%

Well, not exactly sugar-coated is it? And I'm not sure if this will help, but sometimes it's all about the time of year. On 12/31/99, their sales were at 1586.1, only slightly higher that what we are looking at for their most recent report. Maybe during the last quarter, since it was the holidays, people were having cookies and eggnog for breakfast? Perhaps they were skipping breakfast because of their previous evenings belt-popping experience. I'm not exactly sure, but I'll definitely be checking out their next report to see if my philosophy pans out.

11. Strong Management and Operating History

Kellogg's has been around since the early 1900's. Since then it has continued to expand and has become a household name. Recently, Keebler (you know, of the famous 'elfin magic?) agreed to be bought by Kellogg's for 4.4 billion. Keebler is a solid company as well. Their distribution business is up by 10.5% and their branded segment, i.e., cookies, crackers and brownies, rose 8% to 526.6 million. Get this, Keebler shares have outperformed the S&P 500 by 85-plus percent this past year! What a great investment, Kellogg's!

Kellogg's CEO, Carlos Gutierrez, is the Chairman, CEO, and President of Kellogg's.  He joined the company in 1975 in Mexico City, Mexico as a Sales Representative. He continued to work his way up to CEO in April of 1999 to his current position, which he began in April of 2000. Although Kellogg's struggles against other giants in the industry such as General Mills, Kraft Foods, and Quaker Oats, Mr. Gutierrez is working diligently to maintain their strong position. He feels that in the past years they focused too much on being a producer of healthy foods. That works fine for some in the market but let's face it, you have to throw in some fun stuff because we all adore our junk foods, too! So he plans to focus on bringing out some new exciting products, and more convenient products such as their new "Snack 'Ums," their most popular cereals put into a can to snack on.

12. Buy On Sale

52-Week High: 32

52-Week Low: 20.75

Current Price: 27

Kellogg's is a great company that has been around for a long time. As I look around my desk I can't help but grin at the empty Pop-tart wrappers that surround me. I thank my lucky stars every day that I had them to get me through such an agonizing time. I'm feeling much better now. and considering checking into Vlasic.