Try not to choke on your Kellogg’s cereals if you’re reading this over breakfast. Actually, if you’re just as the majority of the US households, your cornflakes probably belong to a different manufacturer.
What is going on here? Well, according to Prescience Point and their detailed report, Kellogg, or simply K, isn’t the company you should consider investing in during 2018. Doing that in 2016 and 2017 was also a big mistake. But let’s see what exactly is going on.
Prescience Point clearly pinpointed the reasons why Kellogg’s keeps failing in many fields and even predicts a staggering fall of 35% in the share price in the ongoing year (!). The main reason for this (un)expected plummeting of shares lies in poor management. Actually, they were certainly very successful in managing their own finances. What else would you call self-assigning of bonuses while laying off workers? As for the company’s benefits, they failed to attend to them. Actually, too many changes in leading positions have occurred recently for it not to be taken as a clear warning sign. Kellogg’s ex-CEO, John Bryant, decided to suddenly retire at 52, having obtained a $13 bonus in 2017. The managers in leading positions are being relocated as you are reading this. Even Steve Cahillane, the current CEO, stated that 2018 is going to be a “transition year”, and we all know what that implies. Lots of difficulties and a decrease in stocks and shares.
Naturally, this couldn’t simply happen overnight. Having studied the last decade of K’s business, Prescience Point declares it is mostly the short-sightedness of the company that has led to this situation. While K is an old American household name, it failed to notice other cereals brands are becoming well established, too. Also, people nowadays pay huge attention to calories and sugar intake, which was taken into consideration by cereal companies who have successfully changed their recipes. Not by Kellogg’s, though.
Therefore, the future does not look bright for one of America’s oldest cereal manufacturers. This comes as a consequence of all the artificially inflated profits, especially during 2016 and 2017. Switching from a ‘sell-through’ to ‘sell-in’ model enabled the company to show off higher revenues. Basically, it was offsetting early payment discounts, and pulling forward future-period sales. Eventually, all this resulted in a stuffed channel which Kellogg has been successfully hiding for years. Nothing lasts forever, though, and neither do these well-concealed financial tricks.
Now that cat’s out of the bag, we can expect some serious changes to take place in 2018. Kellogg has to cut its dividend, or it will risk a credit ratings downgrade. Some high executives have already left the (sinking) boat (John Bryant and Ronald Dissinger), while the new management is trying to create the best possible strategy to clear up the mess they’ve found. There’s lots of accounting that was done only for the purpose of hiding the deteriorating process.
There is still some hope for K to recover from the consequences of poor management, but it will remain to be seen. In the meantime, watch Kellogg’s shares falling and wait for the remedies of the new management to (eventually) kick in.