Merion Road Capital, an investment advisor, released its third-quarter 2023 investor letter. A copy of the same can be downloaded here. In the third quarter, Merion Road Small Cap Fund returned (3.1%) compared to a (5.2%) return for the Russell 2000 Index and (0.4%) for the Barclay Hedge Fund Index. Furthermore, MRCM Long Only Large Cap returned (2.6%) compared to a (3.2%) return for the S&P 500 Index. In addition, you can check the top 5 holdings of the fund to know its best picks in 2023.
Merion Road Capital highlighted stocks like WK Kellogg Co (NYSE:KLG) in the third quarter 2023 investor letter. Based in Battle Creek, Michigan, WK Kellogg Co (NYSE:KLG) is a food company that offers ready-to-eat cereal products. On October 20, 2023, WK Kellogg Co (NYSE:KLG) stock closed at $10.14 per share. Five days return of WK Kellogg Co (NYSE:KLG) was 2.42%. WK Kellogg Co (NYSE:KLG) has a market capitalization of $867.934 million.
Merion Road Capital made the following comment about WK Kellogg Co (NYSE:KLG) in its Q3 2023 investor letter:
“Since the quarter ended I have built a small- to mid-sized position in WK Kellogg Co (NYSE:KLG). KLG is the North American business spun-out from the business formerly known as Kellogg. There is a ton of pessimism around this company. Two weeks before the spin the Wall Street Journal put out a scathing article on the cereal industry titled “It’s the Breakfast of Champions No More: Cereal Is in Long-Term Decline.” Unrelated, Ozempic and other GLP-1s have been a topic dejour and deemed to be a massive headwind to any unhealthy food product. Industry issues aside, KLG has recently performed worst amongst the big three (Post and General Mills being the other). In 2021 their production was stymied by a fire at their plant in Memphis and a strike by 1,400 people; production lagged and KLG generally lost share. Add in the fact that the spin accounted for only ~5% of the value of the parent company and it makes sense why most legacy shareholder receiving the stock would prefer to dump it into the market.
KLG owns highly recognizable and established brands like Frosted Flakes, Raisin Bran, Special K, Fruit Loops, and even Kashi for the health-conscious consumer. They have historically generated about $2.8bn in revenue but EBITDA margins were only in the mid- to high-single digits. Part of this can be explained by being a small part of a much larger company. Some brands were run separately from others, geographies were split, and the sales force was responsible for selling not just cereal but the whole arsenal of Kellogg product. By eliminating silos and having a dedicated sales force management hopes to drive margin improvement and regain lost share. More importantly, however, they plan to invest several hundred million into their outdated manufacturing facilities. Management is targeting a 5% margin improvement over the next couple years which would still leave them below Post, which operates in the 15%-20% range. If margins don’t move up much from here earnings are probably in the $0.75 range putting the stock at 13x. Assuming operating margins improve 3% off LTM figures (to account for any incremental depreciation expense) we would get to $1.50 in earnings or less than 7x. This all compares favorably to Post and General Mills multiples in the mid-teens. While there is a lot to dislike about KLG, the risk return seems attractive.”
WK Kellogg Co (NYSE:KLG) is not on our list of 30 Most Popular Stocks Among Hedge Funds. In addition, please check out our hedge fund investor letters Q3 2023 page for more investor letters from hedge funds and other leading investors.
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Disclosure: None. This article is originally published at Insider Monkey.