Share price of Pringles maker Kellanova surged 18% in early trading on Monday, after reports said candy giant Mars was exploring a potential buyout of the company. Stock of Kellanova a collection of snack and food brands spun off from Kellogg less than a year ago are soaring even though it’s a terrible day for stocks, generally speaking.
The S&P 500 was down almost 4% as of 11 a.m. ET, which is an enormous single-day move for this large index. But Kellanova stock was soaring, almost 14% because of it being an acquisition target by Mars.
Kellanova’s possible buyout by Mars surges the stock
A buyout by family-owned Mars of Kellanova, known for snacks brands such as Rice Krispies Treats and Pop-Tarts, would be one of the biggest ever in the packaged food sector.
“We believe that K’s portfolio of popular snack brands will fit well with Mars’ and help them expand scale in international markets,” TD Cowen analyst Robert Moskow said.
Increasing buyouts
Buyouts in the packaged food space has picked up since last year, including Campbell Soup’s $2.33 billion buyout of Rao’s pasta sauce owner Sovos Brands and J.M. Smucker’s (SJM.N), opens new tab acquisition of Twinkies maker Hostess Brands for $5.6 billion.
Analysts have said Kellanova’s deal with Mars could usher in more consolidation in the sector.
Is Kellanova stock a good buy?
Kellanova share price rose to $74.33 on Monday even as broader U.S. stocks fell on fears of the country tipping into recession.
Chicago-based Kellanova had a market value of about $27 billion, including debt, as of the stock’s Friday close.
In its second-quarter results, the company raised its annual organic sales and profit forecasts, owing to steady demand for its largest brand Pringles and effective promotions.
D.A. Davidson analyst Brian Holland expects Kellanova to fetch upwards of $87 per share in a takeout, based on 15 times its projected earnings before interest, taxes, depreciation, and amortization (EBITDA) over the next 12 months.
Why the sudden interest in Kellanova ?
Kellanova made up the global snacking business of Kellogg, before the packaged food giant spun off its slow-growing North America cereal unit WK Kellogg last October.
Sales growth at U.S. packaged food companies such as Kraft Heinz , Mondelez and Hershey have taken a hit as budget-strapped customers save their dollars for essential purchases and hunt for cheaper, private-label alternatives to pricier branded items.
“At times like this when growth slows, balance sheets are relatively clean, and valuations dip, the market leaders in food tend to look more closely at big combinations to drive cost synergies,” TD Cowen’s Moskow said.
Kellanova’s forward price-to-earnings ratio for the next 12 months, a common benchmark for valuing stocks, was 16.50, compared with Hershey’s 20.99 and Mondelez’s 19.69.
Kellanova’s impressive portfolio
Kellanova’s portfolio includes some of the best-known brands in the world, so the attraction isn’t surprising. But potential buyers would likely have to pay a premium, which is why the stock is up today on the rumors.
Is Kellanova a bargain?
With today’s jump in price, Kellanova now trades at almost 27 times earnings, which may be pushing what it would be worth in an acquisition. Consider that the business is low growth. And while it is successfully working to gain operating leverage, that’s still a high price for a low-growth business.
Kellanova is a solid business, the deal eventually could come to culmination. But investors should keep in mind that acquisition rumors are just that: rumors. If a deal fails to materialize, the stock could easily go back to where it was previously.
So for now jumping to conclusion that a acquisition is going to happen and keep on buying Kellanova stock is a risky speculative game to play.
