Supply Chain Upgrades May Compress Margins, But New Products Like Bear Naked Granola May Stabilize Revenues

Key Takeaways

• Significant investment in supply chain modernization carries execution risks that may impact profitability short-term before expected improvements by 2026.
  
• Declining market share for key brands and reliance on promotions may constrain revenue growth amid operational disruptions from separation activities.
  
• WK Kellogg Co.'s strategic investments in supply chain modernization and innovation position it for improved efficiency, profitability, and resilient growth amid challenging conditions.

Catalysts

Operates as a food company in the United States, Canada, Mexico, and the Caribbean.

• The company is progressing with a significant $500 million investment in modernizing its supply chain, but execution risk and the time required for full realization could impact net margins and profitability in the short term, as these improvements are expected by 2026.
  
• The ongoing separation activities from Kellanova, which require considerable resources, could create short-term operational disruptions and increased costs, potentially compressing net margins as the company transitions to its own infrastructure by mid-2025.
  
• Despite a stable category backdrop, market share has been declining, particularly with key brands like Special K, which could impact revenue growth if the trend continues and planned innovations fail to gain traction.
  
• The impact of potential tariffs on Mexico and Canada presents a significant risk that is not accounted for in the 2025 guidance, potentially affecting revenue and net margins depending on how trade relations evolve.
  
• While the company plans to maintain a stable top line with slight growth in EBITDA for 2025, the reliance on promotional activity and competitive pressures could constrain revenue growth and limit the ability to expand margins.

WK Kellogg Co Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming WK Kellogg Co's revenue will decrease by 0.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.7% today to 7.1% in 3 years time.
• Analysts expect earnings to reach $188.6 million (and earnings per share of $2.17) by about March 2028, up from $72.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $216 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.1x on those 2028 earnings, down from 26.3x today. This future PE is lower than the current PE for the US Food industry at 17.5x.
• Analysts expect the number of shares outstanding to grow by 0.37% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

WK Kellogg Co Future Earnings Per Share Growth

Risks

• WK Kellogg Co. is successfully executing strategic priorities, such as modernizing its supply chain and building new operating infrastructure, which is anticipated to improve operational efficiency and expand profit margins by 500 basis points through 2026. (Impact: Net margins, EBITDA)
  
• The company is actively investing up to $500 million in modernizing its supply chain, which has already improved supply chain performance and contributed to EBITDA growth. This substantial investment indicates a commitment to long-term operational improvements and profitability. (Impact: Net margins, EBITDA)
  
• WK Kellogg Co. is seeing strong innovation efforts with plans for new product lines and brand platform expansions, such as Frosted Bran and Bear Naked granola, which could support stable or improved sales volumes and revenue growth in 2025. (Impact: Revenue)
  
• The company's financial guidance for 2025 reflects confidence in achieving organic net sales and EBITDA growth, driven by operational efficiencies and strategic investments, positioning it for continued financial stability. (Impact: Revenue, EBITDA)
  
• Despite challenging macroeconomic conditions, WK Kellogg Co. has maintained its focus on delivering stable top-line results and margin expansion through disciplined execution, suggesting resilience and potential for sustained earnings growth. (Impact: Revenue, Earnings)

Valuation

• The analysts have a consensus price target of $18.34 for WK Kellogg Co based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $27.0, and the most bearish reporting a price target of just $14.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.7 billion, earnings will come to $188.6 million, and it would be trading on a PE ratio of 10.1x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $21.97, the analyst price target of $18.34 is 19.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.