1. Kellogg Company (K) [NYSE] | Industry: Consumer Packaged Goods
Close 74.05 | 52wk 61.13-78.10 | Vol 1,903,280 | Mkt Cap 26.10B | P/E(ttm) 47.22 | EPS(ttm) 1.57 | Div .50 | Moody’s Baa2
We currently have a price target of $81/sh. of Kellogg (K) stock.
This represents 10% upside to the stocks most recent close of $74.05
on May 17, 2016. The price target is based on 2017 EPS of $3.26 at
a 26 forward P/E multiple discounted 2 years at WACC (3.10%).
The dividend yield is currently 2.60%. We believe lower, stable
commodities pricing and an uptick in domestic demand provide the
catalyst necessary to ease the ongoing margin pressures Kellogg has
experienced over recent years.
Investment Summary
As Kellogg’s continues to focus on cost control measures such as
zero-based budgeting and Project K, savings will provide a positive
impact on margins going forward. Combined with falling
commodities prices and increasing demand on both domestic and
foreign markets, Kellogg’s is set to outperform.
 Zero Based Budgeting - Expected to deliver visibility to $100
million in annual savings in North America during 2016. ZBB will
expand into Kellogg’s international businesses during 2016 with
modest savings expected in certain locations in 2016. Kellogg’s
expects increased savings to be realized in their international
businesses in 2017 and beyond.
 Projects K - Expected to generate between $425M and $475M
of annual cost-savings by 2018.
 Commodity Pricing - Commodity Prices for items such as corn,
wheat and coarse grain have come down nearly 60% over the past
two years and are expected to remain stable, providing a 2% - 5%
decrease in COGS for Kellogg’s going forward.
 Domestic Demand - Domestic demand seems to have bottomed
out and is expected to trend upwards at a moderate pace. Expected
compound annual growth of domestic demand for the period 2015 -
2019 is projected to be 0.8%.
 Global Growth - The global market is expected to perform in a
similar pattern with CAGR of 2.7% for next five years and it will
reach a value of $36,498.8m in 2019. Also, CAGRs of the European
and Asian-Pacific market will be 2.6% and 5.7% with a value of
$10,351.9m and $4,382.7m in 2019 respectively.
We believe lower, stable commodities prices and an uptick in
domestic demand provide the catalyst necessary to ease the ongoing
margin pressures Kellogg has experienced over recent years. A price
target of $81/ sh. represents 10% upside to the stocks most recent
close of $74.05 on May 17, 2016.
Jinwoo Lee
Andrew S. Machado
Drilon Tershalla
Zachary T. Uher
Professor: Manoj Dalvi
FIN 4710
Advanced Investment Analysis
18 May 2016
Recommendation: Overweight
Target Price: $81/sh.
Dividend Yield: 2.59%
Shares Outstanding: 350.05M
Float: 278.29M
Held by Insiders: 0.25%
Held by Institutions 82.60%
$60
$70
$80
Apr-15 Oct-15 Apr-16
Kellogg (K)

2. Company Synopsis
Business description
The Kellogg Company was founded by Will and
John Kellogg in 1906. It was incorporated in
Delaware in 1922 and went public in 1952. Its
subsidiaries are engaged in the manufacturing and
marketing of ready-to-eat cereals and
convenience foods such as: cookies, crackers,
savory snacks, toaster pastries, cereal bars, fruit-
flavored snacks, frozen waffles and veggie foods.
Kellogg products are manufactured in 20
countries and marketed in more than 180
countries. Cereal products are generally marketed
under the Kellogg’s name and are sold to the
grocery stores through direct sales force for resale
to consumers.
Kellogg’s also markets cookies, crackers, crisps,
and other convenience foods under other brands
such as: Keebler, Cheez-It, Murray, Austin and
Famous Amos. These are then distributed to
grocers in the United States primarily through a
direct store-door (DSD) delivery system, although
other distribution methods are also used.
Management/ Governance
John A. Bryant
Chairman and Chief Executive Officer
Mr. Bryant has been Chairman of the Board for
Kellogg Company since July 2014 and has served
as a Kellogg director since July 2010. In January
2011, he was appointed President and Chief
Executive Officer after having served as the
Executive Vice President and Chief Operating
Officer since August 2008. Mr. Bryant joined
Kellogg in March 1998, and over the next 8 years
was promoted to a number of key financial and
executive leadership roles. He was appointed
Executive Vice President and Chief Financial
Officer, Kellogg Company, President, Kellogg
International in December 2006. In July 2007, Mr.
Bryant was appointed Executive Vice President
and Chief Financial Officer, Kellogg Company,
President, Kellogg North America and in August
2008, he was appointed Executive Vice President,
Chief Operating Officer and Chief Financial
Officer. Mr. Bryant served as Chief Financial
Officer through December 2009.
Ronald L. Dissinger
Senior Vice President and Chief Financial Officer
Mr. Dissinger was appointed Senior Vice
President and Chief Financial Officer effective
January 2010. Mr. Dissinger joined Kellogg in
1987 as an accounting supervisor. During the next
14 years he served in a number of key financial
leadership roles, both in the United States and
Australia. In 2001, he was promoted to Vice
President and Chief Financial Officer, U.S.
Morning Foods. In 2004, Mr. Dissinger became
Vice President, Corporate Financial Planning, and
CFO, Kellogg International. In 2005, he became
Vice President and CFO, Kellogg Europe and
CFO, Kellogg International. In 2007, Mr.
Dissinger was appointed Senior Vice President
and Chief Financial Officer, Kellogg North
America.
Alistair D. Hirst
Senior Vice President, Global Supply Chain
Mr. Hirst assumed his current position in April
2012. He joined the company in 1984 as a Food
Technologist at the Springs, South Africa plant.
While at the facility, he was promoted to Quality
Assurance Manager and Production Manager.
From 1993 to 2001, Mr. Hirst held numerous
positions in South Africa and Australia, including
Production Manager, Plant Manager, and
Director, Supply Chain. In 2001, Mr. Hirst was
promoted to Director, Procurement at the
Manchester, England facility and was later named
European Logistics Director. In 2005, he
transferred to the U.S. when promoted to Vice
President, Global Procurement. In 2008, he was
promoted to Senior Vice President, Snacks
Supply Chain and to Senior Vice President, North
America Supply Chain, in October 2011.
Industry at a Glance
Over the past five years, the breakfast cereal
industry has been volatile due to price fluctuations
of necessary commodities. A Russian export ban
in 2010 resulted in the drastic price increase of
wheat in 2011. Also, other major inputs such as
sugar, coarse grain and corn increased their prices
due to supply shocks. Although the prices of
commodities have declined, pressure for all-
natural products from consumers have resulted in
increasing development costs and are expected to
contract profit margins over the next five years.
The price hikes consequently caused many
operators to exit the industry or become acquired.
For example, Post Holdings acquired MOM
Brands in 2014 to expand and diversify within the
industry.

3. 2
North America
The breakfast cereal industry in the US is the most
lucrative in the world. The UK market is in second
by a vast difference, being more than 5 times
smaller.
Changing domestic consumer trends and
economic recovery have translated to a
contraction in demand for cereal ever since 2011
(Figure 1). As low-carb diets have become
popular, there has been less demand for cereals.
In addition, industry revenue has declined due to
the rise of disposable income. Consumers tend to
spend more money on luxuries that they could not
previously afford due to the recession. For
instance, they will now choose to go to a café for
pastries rather than have cereal at home.
Figure 1
During the next five years, rising levels of per
capita disposable income will encourage
consumers to purchase more expensive premium
cereals, which are marketed as more nutritious.
However, growth will be limited by rising
competition from substitutes that may offer more
convenience such as fast-food breakfast
sandwiches.
The US breakfast cereal market sported total
revenues of $13,523.7M in 2014, representing a
compound annual growth rate (CAGR) of 0.7%
between 2010 and 2014. In comparison, the
European and Asia-Pacific markets grew with
CAGRs of 2.7% and 5.5% respectively. In terms
of dollars: in 2014, the European market reached
$9,086.5M in revenue, and Asia-Pacific reached
$3.321.0M.
The performance of the market is forecasted to
follow a similar pattern with an anticipated
CAGR of 0.8% from 2014-2019. Thus, expanding
the US market value to $14,054.0M by the end of
2019.
Global
The global breakfast cereal market had total
revenues of $31,915.9M in 2014, representing a
CAGR of 2.7% from 2010 to 2014.
The global market is expected to perform in a
similar pattern with CAGR of 2.7% for next five
years and it will reach a value of $36,498.8m in
2019. Also, CAGRs of the European and Asian-
Pacific market will be 2.6% and 5.7% with a value
of $10,351.9m and $4,382.7m in 2019
respectively.
Competitive Analysis
Kellogg Company is one of the leading
competitors in the breakfast cereal industry.
Kellogg’s market share in 2016 is 27.3% in the
U.S. (34% global leader), which is the second
largest following General Mills Inc.’s 28%
market share. Some other major competitors
include Post Holdings Inc. and PepsiCo Inc. they
have market shares of 20.9% and 6.1%
respectively.
In past years, Kellogg has remained a global
leader in the breakfast cereal industry. In 2012,
the company announced a joint venture for
manufacturing, sales and distribution with
Wilmar International Limited, one of the largest
food businesses in Asia. Thus, expressing
Kellogg’s interest in expanding their business to
Asia, especially China.
Compared to the other competitors, one of
Kellogg’s strengths is their strong and
recognizable brand names such as Special K,
Froot Loops, and Corn Flakes. In addition, due to
the company’s geographic diversity, products of
Kellogg’s are manufactured in 20 countries and
marketed in more than 180 countries.
A major weakness is that consumers have
preconceived notions that Kellogg’s products
contain a lot of sugar. However, the company has
developed various healthy cereals and now are

4. 3
also known for healthy cereals and snacks such as
Special K, and Fiber Plus.
The price changes of raw materials and rising
competitors are threats to Kellogg. However,
Kellogg has minimized pressures from
commodity price changes by using long-term
contracts to hedge their positions. Furthermore,
Kellogg has expanded their market globally so
they can generate more revenue and diversify.
Recent Performance
Total shares outstanding are about 350M, and
their current market cap is $26.1 billion. The 2015
five-year average net income growth was -
13.21%, and the 2015 five-year average EPS
change was -12.22%. Kellogg’s revenue, gross
margin, net income, EPS, return on assets, and
operating cash flow have been decreasing since
2013. Their debt equity ratio is 2.49 and financial
leverage is 7.17. In 2015, Kellogg Co. reported a
dividend of $1.98, which represents a 4.21%
increase over last year. The stock price was
$74.05 at market close on May 17, 2016.
Kellogg’s generated sales of more than $13
billion in 2015 and at the time the global breakfast
cereals market was worth $32.8 billion. In Q1
2016, Kellogg’s gained 0.2% of the market share
putting their current market position at 34.1%
globally. The high value of the breakfast cereals
market can be attributed to its international spread
and steadily increasing demand. North America
and Europe presently account for the majority of
the global breakfast cereals market, which may be
attributed to the early adoption of breakfast
cereals as the standard breakfast fare. In contrast,
the Asia Pacific market has been a “late bloomer”
and has shown impressive growth rates in the past
few decades. Over the forecast period, the Asia
Pacific breakfast cereals market is expected to
exhibit the highest growth rate, leading to a
respectable 13% share in the global market by
2019.
Financial Trends
Figure 2 illustrates Kellogg’s revenue trend and
margins from 2011 to 2015. The company’s
revenue has increased from 2011-2013 with
respectively 6.6%, 6.8% and 12.2%, followed
with a decrease in revenue of -1.4 % in 2014 and
-7.62% in 2015. Kellogg has had higher gross
profit margins compared to its major competitor
General Mills, however the end results show
lower net income rate as percentage of sales.
Figure 2
There may be several reasons behind it however,
looking closely at Kellogg’s income statement we
notice greater than average S&GA expense.
Kellogg has had higher S&GA expense for 2011-
2015 than top competitor General Mills; being a
smaller company in size and incurring much
higher fixed costs than General Mills has alerted
Kellogg’s management to initiate major projects
such Project K and Zero-Base Budgeting.
Word on the Street
Analysts have had mixed thoughts about
Kellogg’s market performance. Goldman Sachs
has recently updated its position from sell to
neutral with a target price of $80-$90. Analyst
Jason English stated that Kellogg has margin
potential which are too large to ignore. Goldman
Sachs updated Kellogg’s future earnings for 2016,
2017 and 2018 with an increase of respectively
0.5%, 2.7%, and 4.1%. Citigroup on the other
hand suggests a buy with a target price of $90.
Figure 3

5. 4
Recent Developments
Farewell CFO
Kellogg has announced, Ron Designer will retire
as Chief Financial Officer at the end of 2017. He
promised to remain with Kellogg during 2017 to
assist his successor make an effective transition to
the company, thus management has already began
looking for a replacement. Mr. Designer has been
working for Kellogg for almost three decades, and
was promoted to CFO about six years ago. He
contributed a great share of work as a member of
the Global Leadership Team, and played crucial
roles in projects the company implemented
throughout the years such as the acquisition of
Pringles as well as Integrated Margin
Management, Project K, Zero based budgeting
and the development of Kellogg’s future growth
plan for 2020.
Regulatory Scrutiny
The FDA is looking to scrutinize foods labeled as
“Healthy,” according to The Wall Journal. The
action intends to re-evaluate all ingredients of
nutrition clams of this food category. FDA has
demanded the public and food experts’ opinion
regarding what type of food should be labeled
“Healthy.” According to sources, foods would
only be marketed as healthy if they meet five
criteria: fat, saturated fat, sodium, cholesterol and
beneficial nutrients, such as vitamin C or
Calcium, e.g. the level of these ingredients differ
among foods but snacks cannot exceed 3mg fat.
With the new guidelines Kellogg should be able
to label “healthy” its Frosted Flakes and low-fat
Pop-Tarts. The new regulations would take a
several years to become in effect.
Investment Thesis
Revenue Disparity
In recent years, volatile commodities pricing,
lower domestic demand and other economic
trends have put downward pressure on revenues.
As a whole this has caused the industry to struggle
and is the catalyst for the revenue growth disparity
between global and domestic revenues. Global
market value has grown by 2.3% to $31.92b in
2014 or 2.7% CAGR since 2010 compared to
domestic growth contracting by 2.6% to $9.75b in
2015, the industry’s largest market.
Figure 4
Contributing Factors
As the industry is capital intensive, margins are
heavily dependent on commodities pricing.
Margins have been squeezed with costs of
commodities such as wheat jumping 100% from
2010 to 2011, coarse grains up 60% within the
same time period and corn up 150% from 2010 to
2012. Additionally, exchange rate volatility has
also put downward pressure on revenues. As the
dollar strengthens, overseas revenues are
adversely affected and limits the gains produced
by an expanding global market.
Figure 5
Industry revenues peaks during times of recession
and drop during times of expansion. This can be
seen domestically as per capita income rises,
demand dwindles. Alternatively, as the global
market begins to cool with countries like China
slowing down, exports are increasing. This
happens as a result of consumers opting for

6. 5
costlier alternatives from indirect competitors
such as restaurants.
Figure 6
A Light at The End of the Tunnel
Domestic demand seems to have bottomed out
and is expected to trend upwards at a moderate
pace. Expected compound annual growth of
domestic demand for the period 2015 - 2019 is
projected to be 0.8%. As demand trends upwards,
domestic industry growth is expected to follow at
an equally moderate pace. Commodities prices
have been falling from highs and are expected to
stabilize, providing margin support. Easing cost
pressures provide the greatest bottom-line impact
for industry firms.
Figure 7
Zero-Based Budgeting
In 2015 Kellogg’s initiated the implementation of
a zero-based budgeting (ZBB) program in the
North America business. This ZBB program is
expected to deliver visibility to $100 million in
annual savings in North America during 2016.
ZBB will expand into Kellogg’s international
businesses during 2016 with modest savings
expected in certain locations in 2016. Kellogg’s
expects increased savings to be realized in their
international businesses in 2017 and beyond.
In support of the ZBB initiative, Kellogg’s
incurred pre-tax charges of approximately $12
million in 2015. The company anticipates that
ZBB will result in cumulative pre-tax charges of
approximately $25 to $50 million through 2016
which will consist primarily of the design and
implementation of business capabilities.
Project K
Project K is a four-year efficiency and
effectiveness program. It is driving the creation
of new and improved capabilities in various parts
of the company. In addition, it is also creating
the supply chain of the future and a global
business services structure; the latter is
streamlining some functional areas within the
company. Project K is a significantly-sized
project, which is expected to generate between
$425 and $475 million of annual cost-savings by
2018. These savings, in addition to those
generated by Kellogg’s zero-based budgeting
efforts, will provide the company the opportunity
to make significant investments in the business
while improving margins.
Valuation
Assumptions
Considering GOGS has been below 55% of sales
during the past five years with the exception of
‘14, ’15 (due to volatile commodities pricing), we
assume a conservative COGS of 57% projected
from 2017-2018 and 55% from 2019-2020 as
Project K and ZBB begin to payoff. SG&A, which
has historically hovered around 26% over the past
five years, is also expected to remain constant.
Conservative revenue growth of .4% is projected
as we have evidence of domestic demand turning
upwards as well as continued success overseas.
Income taxes will remain at a high of 30% held
constant YoY.
P/E Multiple
2016 earnings are projected to be the lowest for
Kellogg’s in recent history, which we believe
provides a unique buying opportunity. At $2.34
2016 EPS and a forward P/E multiple of 26,
Kellogg stock is 20% overvalued. However, it

7. 6
seems a handful of savvy shareholders want to
keep the stock in their portfolio considering a
current stock price above $74. 2017 EPS is
conservatively projected to be $3.26 or $84.76/sh.
(26 P/E), a 15% gain from the stock’s current
price. After discounting the projected price/ sh. to
its present value we arrive at a projected target
price of $81/ sh. (26 forward P/E multiple
discounted 2 years at WACC 3.10%). Coupled
with a 2.60% dividend yield, Kellogg seems to be
the stock to own within any well-diversified
portfolio.
Considering a five-year holding period, 2020 EPS
is projected to be $4.17. At a forward P/E of 26
which is the industry average, the present value of
a common share discounted at WACC of 3.10%
provides a current stock price of $93.10/sh. 22%
upside from the stock’s current market price. It
may be considered that given Kellogg is the clear
market leader, a premium P/E multiple may be
applied which would drive share prices even
higher.
DCF
We have projected EBITDA to increase from
$2.03b to $2.61b and EPS to increase from $1.74
to $4.17 during the period 2015 to 2020.
Moreover, we expect future free cash flows to rise
from $1.13b to $1.25b, including capital spending
in the range of 4 to 5 percent of net sales during
the period. Gross profits are also projected to
increase from $5.53b to $6.18b for years 2016-
2020.
Based on projected free cash flows through 2020
discounted by WACC of 3.10%, enterprise value
is expected to reach $44.98b. Adjusted by current
shares outstanding we determine a current EV per
share value of $127.07 or 67% upside to K’s
current share price.
Risks
Commodities Pricing
Agricultural commodities, including corn, wheat,
soybean oil, sugar and cocoa, are the principal raw
materials used in Kellogg products. Cartonboard,
corrugated, and plastic are the principal
packaging materials used by Kellogg’s. The costs
of the aforementioned commodities may fluctuate
widely due to government policy and regulation,
drought and other weather conditions (including
the potential effects of climate change) or other
unforeseen circumstances.
To the extent that any of the foregoing factors
affect the prices of such commodities and Kellogg
is unable to increase prices or adequately hedge
against such changes in prices in a manner that
offsets such changes, the results of operations
could be materially and adversely affected. In
addition, Kellogg uses derivatives to hedge price
risk associated with forecasted purchases of raw
materials. Hedged prices could exceed the spot
price on the date of purchase, resulting in an
unfavorable impact on both gross margin and net
earnings.
Competitive Landscape
Kellogg faces competition across its product
lines, including ready-to-eat cereals and
convenience foods, from other companies that
have varying abilities to withstand changes in
market conditions. Most of the competitors have
substantial financial, marketing and other
resources. Competition with them in various
markets and product lines could require Kellogg
to reduce prices, increase capital, marketing or
other expenditures, or lose category share. Any of
which could have a material adverse effect on the
business and financial results. Category share and
growth could also be adversely impacted if
Kellogg is not successful in introducing new
products or in effectively assessing, changing and
setting proper pricing.
Large Accounts
Kellogg’s largest customer, Wal-Mart Stores, Inc.
and its affiliates accounted for approximately
21% of consolidated net sales during 2015,
comprised principally of sales within the United
States. As of January 2, 2016, approximately 18%
of the consolidated receivables balance and 27%
of the U.S. receivables balance were comprised of
amounts owed by Wal-Mart Stores, Inc. and its
affiliates. No other customer accounted for
greater than 10% of net sales in 2015. During
2015, Kellogg’s top five customers, collectively,
including Wal-Mart, accounted for approximately
34% of consolidated net sales and approximately
47% of U.S. net sales. As the retail grocery trade
continues to consolidate and retailers become

8. 7
larger, Kellogg’s large retail customers may seek
to use their position to improve their profitability
through improved efficiency, lower pricing,
increased promotional programs funded by their
suppliers and more favorable terms. If Kellogg is
unable to use its scale, marketing expertise,
product innovation and category leadership
positions to respond, profitability or volume
growth could be negatively affected. The loss of
any large customer for an extended length of time
could negatively impact sales and profits.
Foreign Currency
Kellogg’s holds assets and incurs liabilities, earns
revenue and pays expenses in a variety of
currencies other than the U.S. dollar, including the
euro, British pound, Australian dollar, Canadian
dollar, Mexican peso, Venezuelan bolivar fuerte
and Russian ruble. Because consolidated financial
statements are presented in U.S. dollars, Kellogg
must translate its assets, liabilities, revenue and
expenses into U.S. dollars at then-applicable
exchange rates. Consequently, changes in the
value of the U.S. dollar may unpredictably and
negatively affect the value of these items in the
consolidated financial statements, even if their
value has not changed in their original currency.