ConAgra Foods, Inc. (CAG), General Mills, Inc. (GIS): Is Kellogg Company (K) Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Kellogg Company (NYSE:K) fit the bill? Let’s look at what its recent results tell us about its potential for future gains.

What we’re looking for
The graphs you’re about to see tell Kellogg Company (NYSE:K)’s story, and we’ll be grading the quality of that story in several ways:

Growth: Are profits, margins, and free cash flow all increasing?

Valuation: Is share price growing in line with earnings per share?

Opportunities: Is return on equity increasing while debt to equity declines?

Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let’s look at Kellogg Company (NYSE:K)’s key statistics:

K Total Return Price data by YCharts

Passing Criteria	3-Year* Change	Grade
Revenue growth > 30%	18.3%	Fail
Improving profit margin	(35.1%)	Fail
Free cash flow growth > Net income growth	(0.9%) vs. (23.2%)	Pass
Improving EPS	(19.3%)	Fail
Stock growth (+ 15%) < EPS growth	34% vs. (19.3%)	Fail

Source: YCharts.
*Period begins at end of Q2 2010.

K Return on Equity data by YCharts

Passing Criteria	3-Year* Change	Grade
Improving return on equity	(31%)	Fail
Declining debt to equity	43.9%	Fail
Dividend growth > 25%	13.6%	Fail
Free cash flow payout ratio < 50%	54.5%	Fail

Source: YCharts.
*Period begins at end of Q2 2010.

How we got here and where we’re going
Things don’t look good for Kellogg Company (NYSE:K) today. The cereal maker musters only one out of nine passing grades, and even that single pass was granted more on a technicality than because of genuine improvement. Falling profit margins, resulting from a combination of higher materials costs and an ongoing price war with competitors, have been a major hindrance. There’s plenty of room for improvement, but will investors see real progress in the coming quarters? Let’s dig a little deeper to see what lies aheaf.