Kellanova: Unveiling the Intriguing Spinoff of WK Kellogg
Kellanova, formerly known as Kellogg's, has made a noteworthy move by spinning off its business WK Kellogg Co. This separation, approved by the board in September, has caught the attention of investors. For every four shares owned in Kellanova, shareholders will receive one share in WK Kellogg. With several big firms announcing substantial spin-offs during this busy time for corporate America, the market is buzzing with anticipation.
WK Kellogg - A Core Cereal Business
- WK Kellogg, a 117-year-old start-up, was once the core of Kellogg's as a pure play on cereal.
- With a focus on the North American market, WK Kellogg is responsible for producing 800 million pounds of cereals annually.
- Despite waning popularity, cereals remain a preferred breakfast choice for many, giving WK Kellogg a significant market presence with over 60% household penetration.
Financial Outlook for WK Kellogg
- In recent years, WK Kellogg has experienced mixed financial performance.
- Sales in 2021 fell to $2.4 billion, with EBITDA margins dropping to 2%.
- However, the company aims to post flattish sales at $2.7 billion for fiscal year 2024, with improved EBITDA margins around 10%.
- WK Kellogg plans to invest nearly half a billion dollars in upgrades and expects to grow EBITDA margins to the mid-teens, potentially reaching $400 million in EBITDA.
Kellanova - A Diversified Food Business
- Kellanova is the larger remaining business, generating pro forma sales of $13 billion.
- With a stronghold in snacks, brands like Pringles, Pop-Tarts, RX Bar, and Cheez-It contribute to about 60% of sales.
- The company also operates in frozen foods, noodles & others, and has a balanced presence in North American and international markets.
Valuation and Market Perception
- Following the spinoff, WK Kellogg is trading at a lower valuation of around $1 billion.
- Kellanova's share price has fallen from $60 to $53, which has affected the perceived value of the spinoff.
- Kellanova, with a share price of $53 and earnings power of around $3.35 per share, is trading at a reasonable multiple of 15-16 times earnings.
The spinoff of WK Kellogg from Kellanova has sparked intrigue in the market. Both companies are currently undervalued, presenting potential opportunities for investors. While WK Kellogg faces a turnaround challenge, Kellanova is expected to be a secular growth play. Monitoring the standalone business's performance in the coming quarters will help determine the investment potential in either of these firms.
