WK Kellog faces soggy outlook that puts margin expansion in crosshairs: BofA

Investing.com -- WK Kellog faces a battle to improve volumes that could force the cereal maker to ramp up investments, keeping a lid on margin expansion at a challenging time in the cereal category,  BofA said in a Wednesday note.

"We expect industry trends to remain sluggish for KLG over the next 12 months unless a more full scale promotional/price investment reset is contemplated," BofA said as it downgraded its rating on the company to underperform from neutral and cut its price target on the stock to $17 from $24. 

WK Kellog value creation story, the analysts believe, lies in "meaningful 2026 margin expansion which now seems less assured," BofA said.

At its investor day in August 2023, WK Kellog laid out forecasts for flat sales growth through 2026, better than the expected category low-single digits declines, the analysts said. The forecasts were support by expectations for a normalization in service levels and points of distribution as well as share gains, but recent industry data has flagged ongoing struggles. 

"Nielsen scanner trends have remained soft with negative sales growth and share losses persisting," BofA said, warning that |the lackluster volume recovery could lead WK Kellog to reinvest more heavily into its P&L," stunting its short-run margin expansion. 

"Looking at the cereal category YTD, most branded players (with the exception of POST) including WK Kellog are still losing both dollar and volume share to Private Label and other smaller manufacturers," the analysts added.

With the 2026 margins now at risks, the bank lowered its 2024 to 2026 adjusted EBITDA estimates on WK Kellog to $268M, $283M, and $362M, respectively, from $270M, $291M, and $372M.