Should we feel sorry for the shareholders of Kellogg or should we envy them? Strong arguments can be made for either opinion.
The reason to feel sorry for them is very simple: Kellogg’s stock has been a major disappointment. The market has been on a roll during the past three years – truly a bull’s fantasy. In mid-July 2016, the Dow was approximately 18500. However, by mid-July 2019, it was approximately 27350, an increase of nearly 50%. Even in the best of times, gains like these are hard to find.
By comparison, in July 2016 Kellogg’s shares made a high of 86; had they kept pace with the Dow they would now be trading above 120. Unfortunately, the price went the other way, and recently were trading at 55, slightly above a seven-year low.
The problem isn’t just that three years ago Kellogg’s stock fell apart but also that it has continued declining. In the past year alone Kellogg plunged by 23%. During this time, the Vanguard Value ETF rose by 7.4%. And the S&P 500 gained 8.7%. To put this another way, Kellogg’s shares have not only under-performed the overall market but also comparable food firms. This is why we should feel sorry for the company’s shareholders.
At the same time, just maybe we should be envious of them and the reason why is very simple: Kellogg may be sitting on a potential home run product: vegetarian grillers.
This product is not exactly new; it’s already being sold by several companies, including Kellogg. But in the right hands it has proven to be dynamite – and just possibly Kellogg has the right hands.
According to the market website MarketWatch, “Kellogg is sitting on a fake meat gold mine bigger than Beyond Meat.” And that’s saying a lot.
Since going public about three months ago, stock of Beyond Meat (BYND) has soared and is now trading about seven times above the offering price. Beyond Meat, the company created in 2009 by vegan Ethan Brown, has created a sensation both on Wall Street and on Main Street because consumers love its plant-based “meat” burgers. The IPO was priced at $25 and the first trade was made at 46. A week ago the price was approximately 171/share.
Could Kellogg repeat the success of Beyond Meat – or maybe even exceed it? Kellogg executives decline to talk about this, and the analysts who follow the company are just as tight-lipped. However, all the ingredients for the company’s successful attempt of such an effort appear to be in place.
One of these ingredients is that Kellogg already owns the largest single “fake meat” business in the country through its MorningStar Farms, a brand that has been around since the 1970s. So unlike newcomers to the field, it already has shelf space in retail stores, name recognition, and taste approval from shoppers.
“You have an absolutely crazy mania for Beyond Meat stock at the moment,” MarketWatch columnist Brett Arends said. “It’s interesting because Kellogg has been an absolute dog of a stock for a long time. But they happen to be sitting on a very substantial fake meat operation.”
Though the company does not make public many details about this business, it did disclose that it sells over 90 million pounds of MorningStar brand food to consumers annually. One third of those sales are from fake burgers, with the remainder generated by fake chicken, sausage, and other “meat.” Arends estimates MorningStar’s sales at around $400 million, which is about double Beyond Meat’s current sales.
“If [Kellogg] were smart they’d say ‘our job is to raise money for stockholders. Let’s spin this thing out and capitalize on this (fake meat craze) bubble,’” Arends said. “If you have an operation in the fake meat business, this is a great chance to cash in, either through an IPO or by selling (the business).”
Better Than Beyond Burgers?
Wall Street has placed a $10 billion price tag on Beyond Meat, even though its estimated annual sales are only $210 million. According to Arends, MorningStar’s value pales in comparison to the market value Wall Street has assigned to Beyond Meat. As for taste, in an unscientific test Arends found MorningStar’s Grillers “way better” than Beyond Meat’s Beyond Burgers, and not worse than “The Impossible Burger,” which is the latest rage.
While this product is both tasty and high quality, he believes the company is not maximizing the potential this line of products has. “If I were running Kellogg, I would fatten MorningStar up for an IPO,” he says. “I would be thinking about growth branding, about repackaging, about trying to cash on this sudden popularity...”
Very possibly Kellogg is thinking about exactly that, as well as the best way it could maximize its extensive expertise in retail. Of course, the company has been a powerhouse in making and selling cereals for decades, and during this time presumably has learned a thing or two about packaging, marketing, and keeping consumers satisfied.
Even with all the potential excitement spinning off MorningStar could generate, Arends doesn’t see Kellogg spinning off its fake meat business. “The reality is, they are almost certainly not going to do this,” he notes. “...It does seem to me that the management is asleep at the switch.”
One imagines that Wall Street, not to mention Kellogg shareholders, would love to see renewed interest in the stock. Maybe an ad is all that’s needed, for example one showing Tony the Tiger biting into a MorningStar fake meat burger, licking his lips, and roaring to the TV audience, “They’re GRRRREAT.”
Who knows? Maybe one day it will happen.