Evercore ISI Starts WK Kellogg (KLG) at In Line, 'looking for proof-points'

Evercore ISI analyst David Palmer initiates coverage on WK Kellogg (NYSE: KLG) with a In Line rating and a price target of $13.00.

The analyst comments "We are initiating coverage of W.K. Kellogg (ticker KLG) with an In Line rating and $13 price target—23% upside and equal to 7x our 2025e EBITDA of $287M (+10% YoY; cons $288M). With 2023e EBITDA margin at ~9.5% and gross margin at ~28.5% (General Mills closer to 34%) there appears to be a significant margin opportunity at the company. Our model includes roughly 200bp of gross margin improvement through 2025 as revenue management (largely promotion and package adjustment) and modernized supply chain is offset by volume decline. As a result, our model assumes KLG can outpace center-store peers in EBITDA growth over the next couple years (+6% vs +3%). That said, our target valuation is roughly 3 turns below centerstore peers and incorporates our view of 1) downside risk to revenue and gross margin if consumption trends remain weak (e.g. latest 4- week US measured channel sales growth of -4.5% YoY), and 2) execution risk and FCF drag from an ambitious supply chain modernization plan. We will be looking for proof-points that company is effectively executing its strategy."

For an analyst ratings summary and ratings history on WK Kellogg click here. For more ratings news on WK Kellogg click here.

Shares of WK Kellogg closed at $10.58 yesterday.

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