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Analyst: Kellogg Trims The Fat By Selling Keebler, Other Snack Brands

K, MDLZ | April 2, 2019

Kellogg Company (NYSE: K) on Monday announced it's selling Keebler and several other businesses to the Ferrero Group for $1.3 billion.

The Analyst

Morgan Stanley's Dara Mohsenian maintains an Equal-weight rating on Kellogg with a $56 price target.

The Thesis

Kellogg agreed to sell its cookies, fruit and fruit-flavored snacks, pie crusts, and ice cream cone businesses to Ferrero. The brands involved in the sale include Keebler, Famous Amos, Mother’s, Murray brands, Stretch Island brand, and cookies manufactured for Girl Scouts of the USA. These businesses generated $900 million in sales with approximately $75 million in profit, representing 6.6 percent of Kellogg’s sales.

Morgan Stanley says the divestiture makes sense given Kellogg's subpar positioning at No. 2 in cookies with a 9-percent share, compared to Mondelez International Inc (NASDAQ: MDLZ) with its 43-percent share. Kellogg also has the No. 3 position in fruit snacks with a 12-percent share compared to General Mills, Inc. (NYSE: GIS)'s 47-percent share.

The analyst says the businesses are less attractive with declining revenue and slightly lower margins than the U.S. snacks average. Kellogg’s cookie sales decreased 5.4 percent year over year in 2018, and fruit snacks were down 20.1 percent year over year.

“We also believe lower scale post the planned divestitures is more manageable now that K has transitioned out of the US snacks DSD model, and K should be able to reduce initial stranded overhead costs over time,” Mohsenian wrote in a note.