NEW YORK — Credit Suisse has raised its target price for the Kellogg Co., saying it expects the Battle Creek, Mich.-based company to follow the lead of competitor General Mills, Inc. and raise its long-term margin targets. The equity research firm upped its target price for Kellogg to $94 in a research note published July 21, up from $86 previously.
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| Robert Moskow, research analyst with Credit Suisse |
“The market’s resounding approval of General Mills’ strategic shift gives the Kellogg management team a ‘green light’ to put more emphasis on cost savings and less on growth,” Robert Moskow, research analyst with Credit Suisse, wrote in the report. “The roll-out of zero-based budgeting in Kellogg’s international divisions gives the company plenty of fuel to drop incremental savings to the bottom line.”
Mr. Moskow said Credit Suisse believes Kellogg’s stock may move higher even if no take-out bid materializes, adding that the absence of any merger and acquisition news won’t matter as long as the management team provides evidence it is acting with a higher sense of urgency to create shareholder value.
“In our experience, management teams can sometimes leverage take-out speculation to further their case internally for more stringent measures to implement change,” he said.
Mr. Moskow said Credit Suisse lowered its forecast for revenue growth and raised its estimate for operating profits for Kellogg, similar to the strategy it has taken with General Mills. And a new operating margin estimate for 2020 of 19% implies 100 b.p.s. (basis points) of expansion per year and compares with Kellogg management’s target of 17% to 18%.
“To be fair, management might not be ready to promise something this ambitious at such an early stage in its four year-plan, especially given the transition in the c.f.o. role,” Mr. Moskow said. “But at a minimum, we think management needs to use its 2Q earnings call to signal its desire to push margins in that direction.”
