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.

Kellogg Company (NYSE:K)

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 Chart

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 Chart

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.