Kellogg Recommendation

Hold
Current Price: Intrinsic Value: 12 Month Target: 62.21 57.70 61.74

Industry Overview
Processed and Packaged Foods Industry

Highly Competitive and concentrated Raw materials Cereal market decline

Business Description
34% domestic share Worlds 2nd largest Consistent single digit growth

Acquisitions and joint ventures Focus on innovation and branding

relationships

2012 Sales by Segment

7.11 7.9 26.1
US Morning Foods & Kashi US Snacks US Specialty

17.8

North American Other Europe Latin America

10.46 7.9

22.7

Asia Pacific

Kelloggs Business Model

Global Manufacturing Footprint

Growth Strategy
Global Cereal Leadership Increase Global Snack Business Growth Strategy Focus on Frozen Foods Emerging Markets

Porters Five Force Analysis

Factor: Score: Description
MODERATE Wal-Mart accounts for 20% of sales High buyer costs associated with delaying or not purchasing Kellogg Company due to their brands and customer loyalties. Essential raw materials used in production fluctuate Derivatives to hedge commodities Other competitors: General Mills, Kraft Low cost for switching to substitutes. Economies of scale large start up costs high brand loyalty

Buyer Bargaining Power

Supplier Bargaining Power Rivalry Threat of Substitutes Threat of New Entry

MODERATE STRONG STRONG

WEAK

Revenue Drivers

Investment Thesis
Margin Drivers
Risk Factors

Investment Recommendation: Hold

Essentials Kellogg Company (K) 62.21 52wk Range: Revenue (2012) Market Cap: Dividend Yield Beta Riskless Free Rate 54.10 - 67.98 14.2B 22.68B .16 (.50%) 0.52 3.85% Actual Price (as of 11/17/13) 62.2

Valuation Estimates
Intrinsic Valuations Discounted Dividends Free Cash Flow Residual Income Retained Earnings Average 56.50 57.27 60.74 56.29 57.70

Shares Outstanding 362.4

EPS Forecast Kellogg

2012 2.67

2013E 2.71

2014E 2.73

2015E 2.75

Projected Net Revenue

(Billions) 1595 1755 1930 2123

2335

1450 1123

2011

2012

2013E

2014E

2015E

2016E

2017E

Cost Savings
Building Global Supply Chain Functional Efficiencies Global Category Teams Global Business Services Model

China

Brazil

Sensitivity Analysis
0 Sales Growth +/- 2% 50 100

Beta +/- .05 Low Gross Margin +/- 3.5% High

SG & A Expense +/- .5

Market Risk Premium +/- .5

Restated Recommendation

Hold
Business environment is unlikely to change substantially in short term It is sensible to hold and see what further growth may come from acquisition and development of emerging markets

Appendix
Financial Statements GDP

Kellogg Income Statement Kellogg Balance Sheet

United States GDP World GDP

Graphs
Kellogg Market Performance Earnings Per Share Debt Level Graph Price Index Emerging Markets Current Contribution to Net Sales Free Cash Flow Gasoline and Crude Oil Prices Research and Development Expense P/E Ratio

Acquisitions
Pringles

Ratio Analysis
Ratio Analysis 1 Ratio Analysis 2

Appendix Home

Kellogg Market Performance

Appendix Home

United States GDP

Appendix Home

Earnings Per Share

2007A 2008A 2.76 2.99 2009A 3.16 2010A 3.4 2011A 2.38 2012A 2.67 2013E 2.69 2014E 2.71 2015E 2.73 2016E 2.75

4 3.5 3 2.5 2 1.5 1 0.5 0 2007A 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E

Kellogg Income Statement

Kellogg Income Statement
for the year ended Revenues Costs and expenses: Cost of sales Selling and administrative Interest (income)expense, net Other income/expense, net Restructuring charge, net Total costs and expenses Income before income taxes and cumulative effect accounting change Income taxes Income before cumulative effect of accounting change Cumulative effect of accounting change, net of income taxes Net income Diluted earnings per common share 496.5 3.04 5,493.5 2,426.6 44.1 21.5 45.1 7,985.7 5,403.8 5,784.9 2,606.4 2,689.7 45.0 23.2 (2.5) 8,078.4 8,567.4 58.7 34.1 8,875.7 6,004.7 2,820.4 47.6 3.0 6,313.6 3,137.6 42.9 79.9 9,574.0 7,001.4 3,702.0 25.0 74.7 10,803.1 7,355.07 4,032.96 23.10 7,726.61 4,393.50 21.34 2007A $8,776.9 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E

Appendix Home

2016E

2017E

$8,995.1 $9,488.8 $9,893.0 $10,697.0 $12,253.1 $13,108.57 $14,023.77 $15,002.87 $16,050.32 $17,170.90

8,116.92 4,786.28 19.72 -

8,526.95 5,214.17 18.22 -

8,957.68 5,680.31 16.83 -

11,411.13 12,141.46 12,922.92 13,759.33 14,654.83

791.2 294.7 496.5 -

916.7 340.1 576.6 576.6 3.07

921.4 331.7 589.7 589.7 3.09

1,017.3 349.0 668.3 5.0 663.3 3.4

1,123.0 382.9 740.1 266.1 474.0 3.62

1,450.0 1,697.44 504.4 564.52

1,882.31 631.81

2,079.95 707.11

2,290.98 791.40

2,516.07 885.72

945.6 $1,132.92 $1,250.51 $1,372.83 $1,499.59 $1,630.35 945.6 1,132.92 3.52 3.13 1,250.51 3.45 1,372.83 3.79 1,499.59 4.14 1,630.35 4.50 -

Appendix Home

Debt Level Graph

Kellogg's Debt Levels (billions)

9 8 7 6 5 4 3 2 1 0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Appendix Home

Price Index
Price Index
300.0

250.0

200.0

150.0

100.0

50.0

0.0 1985

1990

1995 Dairy

2000 Cereal

2005

2010

2015

Appendix Home

Emerging Markets Current Contribution to Net Sales

% Net Sales From Emerging Markets
25 20 15 10 5 0 Kellogg General Mills Kraft

Appendix Home

- Purchased for 2.68 billion - Funded from cash on hand and issuance of 2.3 billion of short and long term debt. - The nearly $1 billion increase in 2012 net sales was generated by the acquisition of the Pringles - Triple size of global snack business

Appendix Home

Research and Development Expense

Research & Development Expense (as a percent of total sales)
3 2.5 2 1.5 1 0.5 0 2008 2009 2010 2011 2012

Appendix Home

Kellogg Company General Mills Kraft Foods Group

Appendix Home

World GDP

Appendix Home

P/E Ratio
2007A 19.17
25.00

2008A 14.15

2009A 16.54

2010A 15.02

2011A 21.25

2012A 20.72

20.00

15.00

10.00

5.00

0.00 2007A 2008A 2009A 2010A 2011A 2012A

Appendix Home

Free Cash Flow

2007A 113
150 100 50 0 2007A -50 Series1 -100 -150 -200 -250 -300 2008A 2009A 2010A 2011A 2012A

2008A -269

2009A 79

2010A 110

2011A 16

2012A -179

Appendix Home

Ratio Analysis
Current Ratio 2008A 0.710 2009A 1.118 :Measurement of liquidity, comparing assets and liabilities 2010A 0.916 2011A 0.926 2012A 0.747 CA CL

Net Profit Margin (Return on Sales) 2008A 0.09 2009A 0.10 2010A 0.10 2011A 0.07

:Net income $ generated by each $ of sales 2012A 0.07 Net Income Net Sales

Return on Assets 2008A 1.261 2009A 1.341

:Companies ability to utilize its assets to create profit 2010A 1.269 2011A 0.777 2012A 0.757 Net Income Beg+End Inv/2

Total Debt to Assets 2008A 0.868 2009A 0.796

: company's ability to absorb asset reductions arising from losses without defaulting on liabilities 2010A 0.818 2011A 0.849 2012A 0.837 Total Liab Total Assets

Appendix Home

Ratio Analysis
Debt to Equity 2008A 6.56 2009A 3.93 : Shows how well creditors are protected from insolvency 2010A 4.49 2011A 5.64 2012A 5.12 Total Debt Total Equity

Total Asset Turnover 2008A 1.15 2009A 1.14 2010A 1.08

: Activity of the assets and the ability of the business to generate sales through the use of assets 2011A 1.11 2012A 0.67 Net Sales Average Total Assets

Gross Profit Margin 2008A 0.419 2009A 0.429

:relationship between net sales revenue and the cost of goods sold 2010A 0.427 2011A 0.390 2012A 0.383 Gross Profit Net Sales