Analysts applaud Kellogg breakup, predict competition (NYSE:K)

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The Kellogg Company (NYSE:K) the decision to separate its lagging cereal business from its booming snacks business is a welcome move, according to early reactions from analysts.

For example, Stifel analyst Christopher Growe indicated that the split allows growth in snacks to enjoy while the cereals business seeks to sustain its sluggish sales. In the meantime, Growe expects the spin-off of the plant-based foods subsidiary to make it more flexible in terms of strategic repositioning and even a possible sale of the business. It should be noted that Kellogg’s (K) plant-based food entity is profitable compared to consistent losses marked by peers like Beyond Meat (BYND).

“The break will allow each entity to focus on its distinct strategic priorities with financial objectives tailored to each company’s profile,” he wrote. “We believe the announcement is positive for the stock.”

UBS analyst Cody Ross largely reinforced this view, indicating that a higher multiple is appropriate for the snacks sector once it operates on its own. Mondelez (MDLZ), Utz (UTZ) and PepsiCo (PEP) were identified as close comparisons for the prospective multiple that could be granted to the newly created company. He added that he expects the standalone business to compete well in this market, as an independent entity allows for more focus on the strong segment.

The remaining grain business is expected to woo a multiple more in line with key competitors such as Post Holdings (POST) and Conagra Brands (CAG).

Granted, Ross was more skeptical of Tuesday’s premarket for stocks.

“We suspect that some [the gains] may be due to a short squeeze,” he advised. “The stock has above-average short-term interest for our coverage and recent investor conversations have indicated that sentiment has turned negative given the potential additional inflation on the horizon for Kellogg’s (K) and its inability to pass on price at the same rate as in the past year.”

Shortly after Tuesday’s market open, a more than 8% rise in stocks during pre-market hours moderated to about a 2% gain.

Learn more about CEO Steve Cahillane’s expectations for separate businesses.

Martin E. Berry