Kellog Analysis
... Quarter Net Income: 203.9 ($Mil.) Last Quarter EPS: .50 P/E Ratio: 18.2 Most Recent Earnings: 0.50 on 07/28/03 Earnings Per Share: 1.85 Most Recent Split: 2-1 on 08/25/97 Annual Dividend Rate: 1.01 Most Recent Dividend: 0.253 on 08/27/03 Annual Dividend Yield: 3.0% PERFORMANCE CHARTS _1year price chart 5year price chart Company Profile Kellogg Co., incorporated in 1922, is the world's leading producer of ready-to-eat cereal products, with an approximate 33% dollar market share in North America and nearly 40% globally. In recent years, the company has expanded its operations from ready-to-eat cereals to also include other grain-based convenience food products, such as Pop-Tarts toaster pastries, Eggo frozen waffles, Nutri-Grain cereal bars, and Rice Krispies Treats squares. With the March 2001 acquisition of the Keebler Foods Company, Kellogg's also markets cookies, crackers and other convenience food products under brand names such as Keebler, Cheez-It, Murray and Famous Amos, and manufactures private label cookies, crackers and other products. These branded products will continue to be marketed through Keebler's direct store door (DSD) delivery system. K is also now marketing some of its other convenience foods products in the U.S. through this DSD system. Products are manufactured in 19 countries and distributed in more than 180. Ready-to-eat cereals include Corn Flakes, Rice Krispies, Special K, Frosted Flakes, All-Bran, Corn Pops, Raisin Bran, Frosted Mini-Wheats, and Low Fat Granola. Cereals are generally marketed under the Kellogg's name and are sold principally to the grocery trade through direct sales forces for resale to consumers and through broker and distribution arrangements in less developed market areas. Sales by product category in 2002 were: cereal 53%, snacks 32%, and all other (Pop-Tarts, Kashi, Eggo, Morningstar Farms) 15%. Sales contributions by geographic region in 2002 were: United States 66.5%, Europe 17.7%, Latin America 7.6%, and all other (including Canada, Australia and Asia) 8.2%. Kellogg's acquisition activity in 2000 included the purchases of Kashi Company, a leading natural cereal company in the U.S., two convenience foods businesses in Australia, and Mondo Baking Company, a U.S. manufacturer of convenience foods. In November 1999, the company acquired Worthington Foods Inc., a leading manufacturer and marketer of vegetarian and other healthful foods, with brands including Morningstar Farms, Natural Touch, Worthington and Loma Linda. The company operated, as of December 31, 2002, manufacturing plants and warehouses totaling more than 18 million square feet of building area in the U.S. and other countries. The principal ingredients in K's products include corn grits, oats, rice, soybeans, various fruits, sweeteners, wheat and wheat derivatives. In producing convenience foods products, the company may use flour, shortening, sweeteners, dairy products, eggs, fruit, chocolate and other filling ingredients. The W. K. Kellogg Foundation Trust holds 34% of the common shares. AREAS OF CONCERN Accounting Change • The company adopted SFAS No. 142 “Goodwill and Other Intangible Assets” on January 1, 2002. Under this standard, goodwill and “indefinite-lived” intangibles are no longer amortized, but are tested at least annually for impairment. The net result of this change resulted in an increase of earnings of over 100 million for FY 2002. Additionally, Kellogg’s assets are comprised of over 50% goodwill and intangible assets resulting mainly from the Keebler acquisition. Independent Auditors and Audit Committee • I question the independent nature of Kellogg’s independent auditors, PricewaterhouseCoopers LLP. In addition to the standard fee of ($2.1 million) for the independent audit report, the auditors provided additional professional services totaling 6.1 million as well as other services totaling ($4.1 million). These other fees include tax consulting and compliance ($3.7 million), accounting and audit advisory services, including benefit plan audits ($.3 million), services provided in connection with acquisition procedures ($.07 million) and review of financial accounting systems ($.02 million). • Although Kellogg’s audit committee meets the NYSE Listing Standards as independent directors, I do not believe that they meet this standard based on their compensation, stock options and other positions held within the company. Insider Influence • George Gund III has sole voting power for 224,000 shares, shared voting power for 36,394,748 shares, and shared investment power for 6,325,492 shares. Of the shares over which Mr. Gund has shared voting and investment power, 2,963,800 shares are held by a nonprofit foundation of which Mr. Gund is one of eight trustees and one of twelve members. Mr. Gund disclaims beneficial ownership as to all 2,963,800 of these shares. • Gordon Gund, a director of the Company, is a brother of George Gund III and may be deemed to share voting or investment power over the shares shown as beneficially owned by George Gund III, as to which shares Gordon Gund disclaims beneficial ownership. Insider activity • Kellogg has an unfavorable insider activity rating as a result of the sale of over (2.5 million) shares in the past six months. Additionally, Dr. Carson, a director, failed to timely file three reports in 1999 for three purchases totaling 1,300 shares and Dr. Zabriskie, a director, failed to timely file one report in 2001 for a purchase of 2,000 shares. Changes in Consumer Tastes and Preferences • Americans are continuing to change their eating habits in a quest for better health. This undoubtedly will keep the pressure on Kellogg to react quickly by offering healthier products, reducing portion sizes, and making other changes demanded by consumers. • About a third of Kellogg's sales are in cookies and crackers. This places Kellogg in a very risky position with large portions of their sales tied up in categories that Americans may view as unhealthy. 2002 Financial Statement Ratios Return on Invested Capital Return on Assets: 720.9 + 391.2 (1-.35) / (10219.3 + 10368.6) / 2 = 9.47% Return on Common Equity: 720.9 / (895.1 + 871.5) / 2 = 81.61% Equity Growth Rate: (720.9 – 412.6) / (895.1 + 871.5) / 2 = .35 Sustainable Equity Growth: .8161 * (1- .57) = .35 Dividend Payout Rate: 412.6 / 720.9 = .57 Effective Tax Rate: 423.4 / 1144.3 = .37 Liquidity Current Ratio: 1763.4 / 3014.9 = .585 Acid Test Ratio: (100.6 + 741) / 3014.9 = .279 Collection Period (days): ((741 + 762.3) / 2) / (8304.1 / 360) = 32.59 Days Sales in Inventory: ((603.2 + 574.5) / 2) / (4569 / 360) = 46.40 Liquidity Inventory Turnover: 4569 / ((603.2 + 574.5) / 2) = 7.76 Working Capital: 1763.4 – 3014.9 = (-1251.5) Cash Ratio: 100.6 / 1763.4 = .057 Cash Flow to Current Liabilities: 999.9 / 3014.9 = .33 Operating Cycle (days): 46.40 + 32.59 = 78.99 Profitability Gross Profit Margin: (8304.1 – 4569) / 8304.1 = 44.98% Operating Profit Margin: 1508.1 / 8304.1 = 18.16% Pretax Profit Margin: 1144.3 / 8304.1 = 13.78% Net Profit Margin: 720.9 / 8304.1 = 8.68% Earnings Per Share (basic): 720.9 / 1275.993 = 1.77 Operating Cash Flow to Income: 999.9 / 720 = 1.39 Asset Utilization and Efficiency Total Assets Turnover: 8304.1 / ((10219.3 + 10368.6) / 2) = .81 Cash Turnover : 8304.1 / ((100.6 + 231.8) / 2) = 49.96 Accounts Receivable Turnover: 8304.1 / ((741 + 762.3) / 2) = 11.05 Days Sales in Receivables: (741 * 360) / 8304.1 = 32.12 Days Sales in Inventory: ((603.2 + 574.5) / 2) / (4569 / 360) = 46.40 Sales to Invento...