Kellogg (NYSE:K) is dealing with a sluggish cereal environment, and a challenging domestic snack market. Therefore, you might not look at Kellogg as the ideal investment option. On the other hand, Kellogg has found ways to consistently reward shareholders for decades, regardless of headwinds. We need to take a look at Kellogg's strategy and determine if it's likely to present a better investment opportunity than General Mills (NYSE:GIS) or Campbell Soup (NYSE:CPB).
A quick look back and ahead
Kellogg recently reported third-quarter results. Diluted earnings per share came in at $0.90 versus $0.89 in the year-ago quarter. However, if you exclude integration costs from the Pringles acquisition ($0.02 impact) and costs associated with Project K ($0.03 impact), diluted EPS came in at $0.95, an improvement over the year-ago quarter.
That's the good news. The bad news is that North America sales slid 1.3%, and Asia-Pacific sales dropped 9.4% year over year. However, Latin America and Europe net sales increased 3.4% and 6.4%, respectively.
Looking ahead, Kellogg expects its fiscal 2013 EPS to come in toward the lower end of its previous guidance of $3.75 to $3.84. This is due to lower than expected sales in certain categories. Cash flow is expected to come in between $1.1 billion and $1.2 billion.
The long-term game plan
The company's Project K is aimed at improving "efficiency and effectiveness". It's interesting that Kellogg wrote it that way, since these two words have the same meaning. Perhaps Kellogg really wanted to stress its point. Whatever the case may be, Kellogg aims for significant savings through Project K, investing the saved money back into the business in order to drive growth.
While Kellogg provides a bullet list for how it will achieve this goal, it can be summed up as thus. Kellogg plans on cutting costs through supply chain and business service consolidation while strengthening its existing business in core markets and expanding in high-growth markets.
This will be done through brand building, innovation, research and development, infrastructure improvements for increased capacity, and the elimination of redundancy. Kellogg will cut its workforce 7% by 2017, and it aims for cash savings of $425 million to $475 million in 2018.
Bottom line, Kellogg might have to deal with some difficult times due to a transitioning phase, but long-term rewards are likely. This is a positive for Foolish investors, but what if there was a peer company that offered both long-term and short-to-medium-term potential? And what if that company was trading at a lower multiple, sported a higher profit margin, demonstrated better debt management, and offered the same yield? Fortunately, that company exists.
Best of breed
That company is General Mills. General Mills is trading at 19 times forward earnings, whereas Kellogg is more expensive at 24 times earnings. General Mills sports a profit margin of 9.76% versus 6.44% for Kellogg. General Mills has a debt-to-equity ratio of 0.99, while Kellogg is leveraged at 2.57. And they both yield 3%.
If these key metric comparisons aren't enough to prove that General Mills is likely to outperform Kellogg going forward, then consider that General Mills plans on increasing its dividend 15% in 2014, and that its buybacks are expected to reduce average diluted shares by 2%.
Five years ago, 25% of General Mills sales were international. Today, that number is north of 33%. General Mills expects to continue growing internationally, and with 200 product launches planned for the first half of 2014, there's going to be plenty of growth potential. General Mills is also highly diversified, with a $4 billion global cereal business, a $3 billion yogurt business, a $3 billion snacks business.
Another interesting option
Campbell Soup is much more diversified than most people realize, owning its namesake brand (a $2.1 billion brand), Pepperidge Farms, Arnott's, Bolthouse Farms, Plum Organics, V8, Kelsen Group (maker of Royal Dansk cookies), and more. Overall, the company generates annual sales just north of $8 billion.
Like Kellogg, Campbell Soup aims to strengthen its core business while expanding in high-growth markets. The latter pertains to categories, segments, channels, and geographies, including packaged fresh foods in retail and organic simple meals for kids.
But while Campbell Soup is likely to be another long-term winner (it has been for almost 150 years), it's still not as impressive as General Mills. Campbell Soup sports a profit margin of 5.69%, its highly leveraged with a debt-to-equity ratio of 3.70, and its trading at a lofty 30 times forward earnings. Like Kellogg and General Mills, it yields 3%.
The bottom line
Kellogg and Campbell Soup have long-term game plans that are likely to be successful. However, it would make sense to consider General Mills first, which is better situated than Kellogg currently, and is more fundamentally sound than Campbell Soup. As always, do your own due diligence prior to investing.
Dan Moskowitz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.