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On Monday, Morgan Stanley (NYSE:MS) initiated coverage on WK Kellogg (NYSE:KLG) shares with an Underweight rating and established a price target of $18.00. The new rating reflects concerns about the company’s earnings visibility, which Morgan Stanley attributes to weak category trends and ongoing market share losses that could impede Kellogg’s ability to meet its margin expansion targets. The company, currently trading at a P/E ratio of 24.1x with annual revenue of $2.7 billion, has shown mixed financial performance with an EBITDA of $302 million in the last twelve months.
The research firm pointed out that Kellogg’s increasing cash needs might limit the company’s balance sheet flexibility, evidenced by a concerning debt-to-equity ratio of 2.04 and current ratio of 0.74. While acknowledging that the valuation of Kellogg shares is not demanding, Morgan Stanley suggests that the current valuation is justified due to the near-term challenges and limited growth prospects for the company in the medium term.
Morgan Stanley’s analysis indicates that the cereal and snack giant is facing significant headwinds that may affect its financial performance. According to InvestingPro data, while the company has been profitable over the last twelve months, short-term obligations currently exceed liquid assets, highlighting potential liquidity concerns. The firm emphasized that the competitive pressures in the market are likely to continue affecting Kellogg’s share and profitability.
The initiation of coverage with an Underweight rating suggests that Morgan Stanley expects Kellogg stock to underperform relative to other stocks in the sector. The price target of $18.00 implies a cautious view on the potential upside for the stock.
Kellogg, known for its cereals and convenience foods, has been working on various strategies to boost sales and margins, but the assessment by Morgan Stanley signals that there may be tough times ahead for the company as it navigates a challenging market landscape.
In other recent news, WK Kellogg reported fourth-quarter earnings that exceeded analyst expectations, with adjusted earnings per share reaching $0.42, surpassing the consensus estimate of $0.23. Despite the earnings beat, revenue for the quarter was $640 million, slightly below the anticipated $647.86 million, marking a 1.8% year-over-year decline. For the full year 2024, the company reported net sales of $2.708 billion, a 2% decrease from the prior year, attributing the decline to challenging business conditions. However, Kellogg improved its profitability, with fourth-quarter adjusted EBITDA rising 7.5% year-over-year to $57 million, and full-year adjusted EBITDA increasing 6.6% to $275 million.
In light of these results, Jefferies analyst Rob Dickerson raised the price target for Kellogg shares to $17.00 from $16.00, maintaining a Hold rating on the stock. The analyst noted that Kellogg’s sales and EBITDA exceeded consensus estimates, with gross and EBITDA margins surpassing expectations by 110 and 40 basis points, respectively. Looking forward, Kellogg provided guidance for 2025, projecting a slight decline in organic sales of about 1%, while expecting adjusted EBITDA to grow between 4% and 6%. The company’s leadership highlighted upcoming innovations and commercial strategies as part of their plan for the year. Despite lower sales, the company remains optimistic about gaining market share within a challenging category.
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