Kellogg Shelves Elves

In what may come as crumbling news to any devout cookie lover, Kellogg (NYSE: K  ) announced that it is thinking about closing down some of its Keebler bakeries in an effort to help shave costs through consolidation and centralization.

No elves are being displaced. These are real people with real jobs, and Kellogg will be negotiating with the related unions to bargain for the plant closures. Despite the upfront costs involved with the potential bakery closings, the company reaffirmed that it still expects to earn between $2.28 and $2.32 per share this year.

Trading at just over 18 times those profit targets certainly doesn't make Kellogg seem cheap. Despite the company's quality line of products -- which go beyond Keebler and the namesake cereal lines to include Eggo, Cheez-It, Pop Tarts, and Morningstar Farms -- this is a company whose organic earnings growth over time will fall well short of what most investors expect when they pay 19 times free cash flow for a company.

While the company occasionally strikes a promising tweak or two -- like its Rice Krispies snack treats, Frosted Flakes cereal bars, and the eureka of charging more for a smaller box of cereal because it contains a handful of dried berries -- Kellogg will offer consistency but none of the glitz that typically commands a market premium.

That's just the way the food makers are. Sure, companies like Kellogg, Kraft (NYSE: KFT  ) , and Campbell Soup (NYSE: CPB  ) may mix things up in their often perplexing product portfolios with acquisitions and asset sales, but they are ultimately slow-growing investment vehicles that require careful detail to valuation.

Even if cereals became the latest dieting rage, Kellogg isn't a pure player. Even rival General Mills (NYSE: GIS  ) isn't all whole grain on that front; it dabbles in everything from yogurt to dinner mixes to refrigerated cookie dough.

These companies may never sell at a discount to their slow growth rates -- there are too many defensive investors who will buy and hold these names they trust -- but that doesn't mean that you want to overpay, either.

Closing some of its plants may improve the company's margins slightly, but it would need a lot more than elfin disappearing magic to justify the stock's current lofty premiums.

Want to see other stories that have that Kellogg flavor baked in?

  • Kellogg had a healthy but plain third-quarter showing last year.
  • Then again, it knew that 2004 would come in just fine.
  • The company's former CEO got the golden boot when he moved from cabinet to Cabinet.

Longtime Fool contributor Rick Munarriz enjoys Kellogg cereals. He's a Frosted Flakes fan. He does not own shares in any of the companies mentioned in this story.The Fool has a disclosure policy. He is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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