The Kellogg split is closely watched amid sub-par returns in the food sector
Tim Boyle/Getty Images News
Kellanova (NYSE:K) and WK Kellogg Co (NYSE:KLG) are being watched closely as the two companies trade on their second day of being independent following the spinoff from parent company Kellogg. Under the separation agreement, Kellanova shareholders received one share of WK Kellogg Co common stock for every four shares of Kellanova stock held as of September 21. Kellanova (K) kept its place on the S&P 500 index following the split, while WK Kellogg Co (KLG) was added to the S&P SmallCap 600 index
Kellanova (K) has a portfolio of brands that include including Pringles, Cheez-It, Pop-Tarts, Kellogg's Rice Krispies Treats, MorningStar Farms, Incogmeato, Gardenburger, Nutri-Grain, RXBAR, and Eggo. While the company's corporate name has changed to Kellanova, the Kellogg's brand will remain on its products around the world. WK Kellogg Co (KLG) will focus and integrate its commercial strategy and execution around breakfast cereal brands, while modernizing its supply chain, all of which it expects will result in improved competitiveness, profitability, and cash flow.
On Wall Street, Morgan Stanley Pamela Kaufman said WK Kellogg Co (KLG) faces muted topline growth prospects due to concentrated geographic and category exposure to North American cereal. However, as a standalone company, KLG is expected to have increased flexibility to execute on its strategic objectives that were previously not a priority for Kellogg. Meanwhile, Kellanova (K) is said to have an improved growth profile following the spin-off of North American cereal as ~60% of its revenue will come from higher growth snacking segments, 50% from outside of the US, and 30% from emerging markets. Kellanova targets 3% to 5% organic sales growth, 5% to 7% EBIT growth, and 7% to 9% EPS growth, in-line with best-in-class food companies such as Mondelez International (MDLZ) and slightly ahead of Hershey's (HSY) topline targets.
Goldman Sachs started off coverage on WK Kellogg (KLG) on Tuesday with a Sell rating on the expectation for a protracted productivity ramp and a debt position seen weighing down valuation.
Analyst Jason English and team see meaningful margin expansion opportunities for the new company, as it appears to be under-earning its potential based on various benchmarking measures. However, productivity programs are likely to be back-end weighted in FY26 and partially predicated on a manufacturing network rationalization that is currently impeded by the plant closure moratorium that it entered into with its unions in late 2021. "Overlay a weak demand backdrop and market share challenges and we expect KLGâs NTM EBITDA forecast to remain range-bound through FY24-end," warned English.
Food sector watch: Returns in the packaged food sector have been subpar in 2023, with companies like Hain Celestial (HAIN) -37%, Campbell Soup (CPB) -30% year-to-date, Conagra Brands (CAG) -29%, General Mills (GIS) -25%, J.M. Smucker (SJM) -23%, and Utz Brands (UTZ) -17% some of the notable decliners. The Invesco Food & Beverage ETF (NYSEARCA:PBJ) is down 7.5% for the year vs. the +12% return for the S&P 500 Index. Some of the packaged food stocks with the highest Seeking Alpha Quant Ratings are Lifeway Foods (LWAY), Mama's Creations (MAMA), and Mondelez International (MDLZ). Looking ahead, U.S. food companies have a new potential headwinds in the mix as diabetes drug Ozempic and other appetite-suppressing medications could prompt overweight Americans to cut down on their calorie intake.

More on Kellanova and WK Kellogg Co

Kellogg: The Problems Of A Low Margin Producer
Kellogg: Decent Results And Cheap Valuation
Stocks To Watch: Spotlight On Inflation Reads, UPS, Disney, Alibaba, Wayfair And Kellogg
Kellanova paying attention to potential threats from weight loss meds
Say goodbye to Kellogg - say hello to Kellanova and WK Kellogg Co