Dear Mr. Berko:
My mama has 162 shares of Kellogg's, which I want her to sell. A friend told her that it won't be taken over by a bigger company and the price will go lower, but she won't sell. What can I do?
-K.D., Detroit
Dear K.D.:
I don't think Mama should sell Kellogg's, but what would you do with the money?
Most folks don't know that Kellogg (K-$76.48) ends with a double g and are surprised to learn that "egg" is the only other common English word ending in double g. Did you know that in 1907, Kellogg's gave a free box of Corn Flakes to every woman who would wink at her grocer? Grocers gave away thousands of boxes of Corn Flakes. But W.K. Kellogg, who founded Kellogg's in 1898, and his brother stopped the promotion. Apparently, the unintended consequences created some marriage problems.
Do you like Keebler's crackers, cookies and pie crusts or Cheez-Its with cheddar, Swiss or colby? How about Special K, Rice Krispies, All-Bran (every mother needs this) and Frosted Flakes? Kellogg's also sells Froot Loops, Coco Pops, Pop-Tarts, Famous Amos cookies and Eggos-K's finest mega-calorie, fat-saturated delights, hardening the arteries of most kids who make it to adulthood.
Last year, 33,000 employees helped K bake and sell $13.3 billion worth of convenience foods, snacks, cereal bars, fruit-flavored treats and toaster-ready edibles. Next year, management may sell more stuff and, very modestly, improve revenues by $200 million, to $13.5 billion. It's no wonder that according to the National Institutes of Health, almost 3 in 4 men are considered to be overweight or obese, as are 40 percent of American women. It appears that the unsourced National Corpulence Index, now at 157.2, continues to make new highs. Our kids are becoming sumo-fat!
Last year's profit margins of 9.75 percent earned Kellogg's $1.3 billion, or $3.70 per share, and each of the 33,000 employees contributed $39,400 to K's net income. In 2017, K expects profit margins of 10 percent. Net profits should grudgingly increase to $1.35 billion ($4 per share), meaning the 33,000 employees would earn K $40,900 each. Each General Mills employee earns his company $47,600, while Wal-Mart's 2.1 million employees earn that company only about $5,000 each (and management would make a pact with the devil to bump that amount higher).
K is a high-class company with a $28 billion market cap. Its common stock represents 75 percent of capital. However, management hasn't kept pace with the constant changes in consumer trends, hampering revenue growth. Lackluster marketing, poor product research and failure to innovate have also impeded revenue progress. Earlier, management unwisely focused its resources on numerous small, locally attractive ideas when leveraging the breadth and depth of its scale would have produced significantly better numbers. Despite K's reputation as an important retailer of natural and organic vendibles, accelerated brand advertising hasn't improved revenues. Numerous inefficiencies in K's supply chain (management failed to allocate proper resources) are forcing K to painfully increase its capital investment to support needed growth. Kellogg's is also having unexpected problems with its 2012 Pringles acquisition, which represents 10 percent of revenues. And most other revenues have been flat as a flapjack.
K, with 350 million shares, expects to earn $4 a share this year and trades at a comfortable 19 times earnings. But management seems moribund and out of step with the world, probably because the median age of its board is 67. Frankly, I doubt the board members would deign to taste a Pop-Tart or a Froot Loop. K's board and management might benefit from an industrial-sized group enema.
As your mama's friend said, there's talk that Kellogg's may be an acquisition target by a heavyweight competitor. I agree with her friend that it probably won't happen. Certainly, the breakup and sale of K's various name brands to competitors would be worth a lot more than $76.48 a share. Individually, the entities could fetch between $122 and $136 a share. However, a large portion of K is owned by the W.K. Kellogg Foundation Trust and Kellogg family members. I doubt this generation of Kelloggs would consider a deal. Still, I believe that Kellogg Co. is a superb long-term investment.
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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com. To find out more about Malcolm Berko , visit the Creators Syndicate website at www.creators.com.
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Published: Thu, Oct 13, 2016
