Fin499 Group 11 Final)

8/9/2019 Fin499 Group 11 Final)

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Fundamental Analysis

Kellogg CompanyGroup 11

Improved diet leads toimproved health


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Contents

Improved diet leads to improvedhealth

Company BackgroundI1


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I. Company background

Improved diet leads to improved


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Kelloggsproducts

Products: cereals, snacks (biscuits,cookies, crackers, toasted pastries,..)

Main products

: cereals.

Improved diet leads to imp

rovedhealth


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Company background

Began: 44 employees in Battle Creek, Michigan 1906 byW.K Kellogg.

Today: manufactures in 18 countries and sells itsproducts in over 180 countries.

Value:

Strong commitment to nutrition, health and quality: thefirst to list the sugar amount on the package.

A good workplace: placed in the top 100 of the BestCompanies to work for (Listed in the Sunday Times).



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Business: divided into 2divisions: Kellogg NorthAmerica, KelloggInternational.

Position:

The worlds leading producer ofcereal.

A leader in industry innovation

and marketing for manyyears.


Company background
http://www.wikinvest.com/image/Cereal.png


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II. Economic Analysis

April, 2010 March, 2010 February, 2010

LeadingEconomic Index

0.1%

1.3% 0.4%

LaggingEconomic Index

0.1% 0.2% 0.2%

CoincidentEconomic Index

0.3% 0.1% 0.1%

Overall, these indexes indicate a slow growthof the economy in the upcoming months.

Source: the ConferenceBoard


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II. Economic analysis(cont.)Relevant indicators

1


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1.GDPU.S. Real GDP Growth Rate

Past Trend Present Value & Future Projection

Future GDP, up to2011, mayincrease at quitestable rates =>positive sign thatfutureconsumption willbe stable.


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2. Disposable personal inc

Stable from the second half of 2009 Predictably in 2010 and 2011, consumption is

not likely to slow down.


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3.InflationU.S. Inflation Rate

Past Trend Present Value & FutureProjection

Inflation tends tofall in 2010 and

2011price of inputs willnot rise up much no or little changein price of outputs


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.PriceCrude Oil Prices

Past Trend Present Value & FutureProjection

In the past 3 years, oil prices fluctuatedgreatly Recently, oil prices have been quite stableand have an upward trend Input prices might increase in the future=>affect price of packaged food.


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5. Consumer confidence in

According to the Conference Board,Consumer Confidence Index has experienced3 consecutive monthly gains

April: 57.7 (base: 1985=100) May: 63.3

Good signal indicating that

consumer spending will increase


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III. Industry Analysis


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1. Industry Background

Processed and PackagedFood Industry- CerealProducts

A 10 billion industrywith40 companiesand more than400

brands.


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1. Industry Background

(cont.) High margin High concentration: semi monopoly (4

biggest firms account for 89% market share)

No seasonality, sale do not fluctuate duringyear

Products proliferation

Store brand name is critically important intensive marketing


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2. Recent situation

MATURE AND STABLE STAGE

Hardly gain impressive earning

Restructuring Program:

- Merger and Acquisition trend

- Outsourcing


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2. Recent situation (cont.)Industry CPI

Source: http://www.ers.usda.gov


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2. Recent Situation (cont.)Affects of recession

During recession year 2008:- Above average growth relatively to 2003-2008

period; however, it was due to higher pricing

strategy

During 2009- Sale remained

- Margin was expanded

RECESSION PROOF


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3. Porters Model


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3. Five forces model (cont.)a. Rivalry among current

competitorsHIGH

Intense competitive among small

firms but less intense for bigpackaged food companies (Kellogg,General Milk, Kraft)

Increasing in private brands

3 Fi f d l


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3. Five forces modelb. Threats of Substitute

productsMEDIUM

Example of substitute products:+ Bakery products

+ Food at home

+ Fast food

etc

Cereal products still the best choice


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3. Five forces model (cont.)c. Threats of new entrants

WEAK

-Mature Stage- Highly concentration ratio


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3 Fi f d l (C t )


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3. Five force model (Cont.)e. Bargaining power of

supplierWEAK

Purchase commodity products: rice, corn,sugar, etc.

Many suppliers


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3. Industry Prospects

Price is stable andprofit margin willexpandin 2010 due to:

- Moderate input cost inflation

- Cost saving program:

+ Productivity initiatives

+ Eliminate low margin products

+ Merger and Acquisition Trend


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IV. Company Analysis

1 G l fi i l


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1. General financialInformation

Recent Stock Price


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Market capitalization

ne of the largest market capitalized companies in the industry


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Kellogg Financialhighlights


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2. Screening ratios


Ratios Results Indication

MV/BV 8.31 The stock might be overvalued

BV/MV 0.12 Growth stock

Total cashper share

1.017 The amount that is immediatelyavailable to shareholder in cash.

Net-net pershare

$ (16.28) The amount that is immediatelyavailable to shareholder in liquidity

assets Low liquidity.Tobin's Q 2.076 >1 The stock might be overvalued

3 Fi i l R ti


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3. Financial RatiosLiquidity ratios

Current ratio


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Liquidity (cont.)

Quick ratio


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Ass

etman

agement

rat io


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Assets management (Cont.) Days sale

outstanding


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Profitability (Cont.)

Return ontotalassets


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Return oncommon equity

Profitability (Cont.)


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Debt management

2009 TotalDebt/Totalassets

Long-termdebt/Totalequity

Debt/Equity

K 79.69% 212.53% 3.92

GIS 71.05% 116.21% 2.45RAH 50.38% 59.56%

PEP 57.83% 43.77% $1.36

-Highly leverage

provide highexpected rate of return forshareholders

- High long-term debt financing A lot of financial obligations


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Debt Management (Cont.)

D bt M t ti


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Debt Management ratio

Debt to Equity Ratio

Higher-than-average use ofdebt financing


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Market value ratios

P/E ttm = 16.13

eta


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4. SWOT analysis

Strengths: Good solid brand names and reliable reputation (with

healthy products)

Good strategy to hedge the risk of inflation (futurecontracts to purchase input)

Still the leading of cereal market market power.

Good brand building strategy(based on advertising andconsumer promotion, not lower the price of theproducts)

Suppliers have no market powerImproved diet leads to improvedhealth


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SWOT analysis (Cont.)

Weaknesses Not aggressively develop many new cereal lines

Lack of close managementin some regions,leading to close the important factory in Georgia(due to sanitation violation)

Cannibalization



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Opportunities

Continue with diversifying the aiding health product line

Develop the service take-away, and door-to-door delivery(theproducts are necessity goods, even in downturn, thecustomers go to restaurant less, but will take home more)

International expansion

Access to new technologybecause of the financial strength



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Threats Economic conditions: recession, housing slump, rising food and

energy prices, a weakening job market drag the consumerlevel

Supermarket consolidation:bargaining power

Big competitors: General Mills, Kraft, Quakers, and theprivate labels.

Machine repair: delay the largest factories reduce revenues

Cannibalization threat.



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V. Intrinsic Value Calculation


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Information update

Stock price (June 4,2010)

$ 53.22

Market capitalization $ 20.26 Bill.

Number of shares

outstanding

380,660,000

52 weeks range 42.84-56

% Insiders 0.89%

% Institutions 82.10%

Trailing P/E (ttm,intraday):

15.62

EPS(trailing twelvemonths)

3.41


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Kellogg valuation Constant Growth DDM Model

g=9.42% (Yahoo Finance)Dividend payout ratio=43% PM=10.29%Assume we hold the stock for 3 years, future earnings and

dividend are forecasted:

Current years Year 1 Year 2 Year 3

Revenue (bill.) 12.724 13.92 15.234 16.67

Net profit(bill.)

1.311.43

1.57 1.72

EPS 3.44 3.76 4.12 4.51

Dividend 1.48 1.62 1.77 1.94

Forward P/E=13.58P3= Forward P/E*EPS3 = 13.58*4.51=$

61.19


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Kellogg valuation (cont)

Risk-adjusted discount rate:

CAPM: K=Rf+(Rm-Rf)

K=0.0014+0.5*0.084= 4.34% (Using Yahoo Finances beta) Vo=$ 58.75

K=0.0014+0.48*0.084= 4.17% (Using self-calculated Beta)

Vo=$ 53.87

Constant growth discount rateK=Div.Yield + g= 2.80%+9.42%=12.22% Vo=$ 47.52


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Kellogg Valuation (Cont)

Comparative P/E P/E industryPEP UL UN GIS MJN SLE CAG CPB SJM

% Market

cap.

30.48%

23.43%

23.48% 7.51% 3.12% 2.90% 3.32% 3.75% 2.03%

Market price(6/4/2010)

61.44

27.09 27.15 73.54 49.59 14.24 24.21 36 55.28

P/E 15.59

18.18 18.22 14.89 24.07 32.36 13.38 15.65 13.99

P/E industry average= 17.41

EPS1 (2010 expected) =3.58 Vo K= P/E industry*EPS1= 17.41*3.58=$ 62.33


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Investment decision

With above estimations of K intrinsicvalue, we assign equal percentage toeach calculated Vo.

Therefore, intrinsic value of K is $ 55.62

Current market price P= $ 53.22 < Vo=$ 55.62

Undervalued Buy!


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Thank you

forlistening!

Pham Phuong Anh

Tran Thi Thuy Dung

Nguyen Thuy Duong

Trinh Thi Quynh Giang

Dao Mai Hoa

Fin499 Group 11 Final)

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