Mars will pay $36 billion, or $83.50 a share, a 33% premium to Kellanova’s Aug. 2 closing price, the day before Reuters first reported the potential tie-up.
Kellanova stock is up more than 40% over the past month as a result. Last October, the former Kellogg Company was separated from its North American cereal business, WK Kellogg (NYSE:KLG). Neither stock had done anything since their separation until the Mars news.
The deal is one of the biggest ever in the packaged food sector. It could spur more mergers and acquisitions with food stocks in the fall and into 2025.
While the horse has left the barn, Mars should have bought these three food stocks instead of Kellanova. All three of them have less debt and more profits.
General Mills (GIS)
General Mills (NYSE:GIS) is the largest of the three alternatives to Kellanova. Its enterprise value is $51.17 billion, nearly double the $31.67 billion for the maker of Special K. However, General Mills is a better buy for three reasons.
First, its EBITDA, or earnings before interest, taxes, depreciation and amortization, margin is 20.54%, 595 basis points higher than Kellanova’s. It’s worked hard in recent years to rework its business to be more profitable and succeeded in doing so.
Second, Goldman Sachs (NYSE:GS) recently initiated coverage of GIS with a “Buy” rating and a $76 price target, about 10% higher than its current price. The investment firm noted that it has historically done an excellent job preserving profit margins compared to many of its peers.
Further, its private label business helps it negotiate choppier economic waters.
Lastly, General Mills reported Q4 2024 (May year-end) results at the end of June. It indicated that fiscal 2025 will focus on growing its sales volumes.
“As we move into fiscal 2025, our top priority is to accelerate our organic net sales growth, and specifically our volume growth, by delivering remarkable experiences across our portfolio of leading brands,” CEO Jeff Harmening said in his press release.
Sales volumes picked up in the second half of 2024. The company plans to use cost savings from its ongoing margin management initiatives and reinvest in new products wanted by consumers.
Ultimately, its brands are better than Kellanova’s.
McCormick & Co. (MKC)
McCormick & Co. (NYSE:MKC) is the first of two companies that would cost Mars less to buy than Kellanova. It has an enterprise value of $25.27 billion and an EBITDA margin of 18.84%.
Although McCormick is generally considered a spice business, it makes and sells a few food products. One of those is Billy Bee Honey, which it acquired for $75 million in February 2008. It is Canada’s number one honey brand.
But even if you can’t argue that it’s a packaged food company, it wouldn’t hurt Mars to own one of the world’s best companies for making food taste better.
Now, I’ll grant you, McCormick’s sales aren’t exactly jumping off the charts at the moment €” its Q2 2024 revenue was $1.64 billion, 1.2% lower year-over-year, while its operating income was $234.1 million, 5.5% higher than a year ago.
In 2024, McCormick expects its adjusted earnings per share to be $2.83, up 4.8% from $2.70 in 2023. It trades at 27.2x this estimate, slightly less than its five-year average.
Between Frank’s RedHot hot sauce, Cholula hot sauce, French’s mustard and Stubbs BBQ sauce, the world is covered for food sauces, spices, and condiments.
Campbell Soup (CPB)
Campbell Soup (NYSE:CPB) is the second of two companies that would cost Mars less to buy than Kellanova. It has an enterprise value of $21.89 billion and an EBITDA margin of 17.03%.
The weird thing about Campbell’s Soup is that it does have some good brands, such as V8 and Prego from its Meals & Beverages segment and Goldfish, Pepperidge Farm, Kettle Brand and Snyder’s of Hanover.
However, It could do some damage in the hands of a strong company like Mars.
In its third quarter ended April 28, its net sales increased by 6% to $2.37 billion. Excluding its acquisition of Sovos Brands in March, its organic sales were flat compared to Q3 2023. Its adjusted EBIT, or earnings before interest and taxes, was $354 million, 13% higher than a year earlier.
The company is in the middle of a multi-year cost-cutting exercise that has eliminated $940 million from its annual budget. It’s on target to get to $1 billion by the end of fiscal 2025.
It expects to earn $3.09 a share in 2024 at the midpoint of its guidance, down slightly from its previous guidance. Its valuation is the cheapest of the three.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.