This post is part of our Big Company, Small Town series, featuring large companies and the small towns in which they are headquartered.
There are probably very few people growing up in North America that have not had Kellogg's (NYSE: K) cereal at some time. I know people that have breakfast cereal for lunch or diner as well. It is the number one U.S. breakfast cereal maker, ahead of General Mills (NYSE: GIS). Among its well-known brands are Frosted Flakes and Rice Krispies.
The company, founded by Keith (W.K.) Kellogg and brother, Dr. John Harvey Kellogg, began with only 44 employees in 1906. Today it employs more than 30,000 people, manufactures in 18 countries, and sells products in more than 180 countries.
Kellogg is a big company in a small town but it is not alone. Battle Creek, Michigan, known as the "Cereal City," is the world headquarters of Kellogg Company and also the home of Post Cereals, which was part of General Foods Corporation and is now part of Kraft Foods (NYSE: KFT). When Kellogg started, there were 42 other cereal companies in Battle Creek.
Looking at the history, the village of Battle Creek began as a market and mill center for prairie farmers. The introduction of rail lines supported farming and the distribution of farm products, and the cereal companies clustered there in the same way that Detroit became the home of the auto industry or the movie business developed with its focal point in Los Angeles.
During the Great Depression, Kellogg altered its production schedule from three to four shifts to keep putting paychecks in people's hands, built a 10-acre park around their plant, and started the W.K. Kellogg Foundation, establishing a clear pattern of investing in the people and supporting their town. There is even a W.K. Kellogg Airport.
Kellogg has been trading between $46.25 and $56.89 over the past 52 weeks. I do not know what to make of its key ratios, which indicate some positives along with some puzzles. Somehow Kellogg has managed to generate a ROE of almost 48% -- that's amazing. Part of the reason is that it seems to have a substantial amount of debt on its books, so it must be using some leverage to achieve that.
A recent press release, Kellogg Company Reports Progress on Its Global Health and Nutrition Initiatives, suggests the company is not sitting idle but trying to focus on growth (and cost cutting) while its source material, all sorts of grains, keep rising in price.
The price-to-sales (TTM) seems fair, but I am put off by the price-to-book of almost 9. At 19, its P/E is higher than average, but it also pays a higher than average dividend yield of 2.38%.
Among the types of consumer goods that look like safe bets in a soft economy I would think Kellogg would be a relatively inert one, but I do not know that I would favor it over an index fund unless I was getting a deep discount.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I do not own shares of any stock mentioned.
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Reader Comments (Page 1 of 1)
6-23-2008 @ 11:23AM
dvoras said...
Mr Liber,
From your 'bio' I can understand why you'd concentrate so heavily on the money aspect of this company. It is un-fortune-ate that the true
organic history of the company has been total-ly ignored. The Kelloggs began production of their cereal (which wasn't the palatable version that graces our tables these days) was motivated NOT
by financial profits, but the health benefits it would afford the clients that came to their health spa(sanatorium). How important it is to realize that most of these 'success-out-of-a-small-town' stories were primarily born out of creating something that would serve fellow human beings(and our animal pals, too) to improve their lives at a very basic level. Making an honest buck doing that had sustained the enterprise. I'd hope they would stay that way.
D. Fairfield
6-23-2008 @ 12:23PM
Sheldon L said...
dvoras, thank you for taking the time to leave your comment. It is true that the Kellogg's brothers did re-invent a better corn flake and it helped propel the company. However, they were very enterprising and made tons of money for providing customers with great value. For us at BloggingStocks.com we must do the same and most readers want to see the financial angle.