Two Elephants Buffett Would Like: Kellogg Company (K), Campbell Soup Company (CPB)

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The H.J. Heinz Company (NYSE:HNZ) takeover by Buffett’s Berkshire Hathaway and 3G Capital at $72.50 per share (or almost 21 times 2013 earnings) made me think of two other companies with similar competitive strengths: globally strong distribution networks and strong brands. The companies I thought of were the almost entirely family owned Campbell Soup Company (NYSE:CPB) and Kellogg Company (NYSE:K). When I take a look at how much cash these businesses can produce and their high potential to take extra leverage and current low interest rates, I see a high probability of these two companies becoming private soon. Let’s take a look at both companies and work on a potential target price for them if they were to be taken private.

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The King Of Soups.

Campbell Soup Company (NYSE:CPB) sells at a steep discount to its peers. While the group sells at around a 17 P/E, Campbell sells at 15 times 2013 earnings (and 10.8 times EV/EBITDA). The reason is simple: without Emerging Markets exposure, the company is growing slowly and the market doesn’t believe the company can grow top line at the 3% to 4% management claims to be expecting. Campbell Soup Company (NYSE:CPB), almost 50% family owned, is a company that I expect to be taken private. Its pricing doesn’t reflect the durability of its cash flows and it doesn’t still reflect the successful job that has been done towards the stabilization of its soup business. I think the family will end up taking the $700 million Free Cash Flow (FCF) company private with the help from some deep-pocketed firm, such as Berkshire.

The King of Cereal (and potato chips)

Kellogg Company (NYSE:K) had, until 2009, a pattern of steady performance and upwards earnings revisions. As most analysts do, I also believe CEO John Bryant wants the company back in that pattern. Now delivering synergies from the Pringles acquisition ($50 million just this year) and having stabilized European and Latin American businesses I expect Earnings Per Share (EPS) to finally end up growing by 6% Year over Year (YoY). Kellogg had to face some problems at its supply chain (Kellogg had to face several product recalls this year) and is facing stiff competition in its cereal business from General Mills. Nevertheless, I think most problems are being addressed well. My primary concern was around the stabilization of Kellogg’s European and Latin American businesses but, as I mentioned before, both those regions were stabilized. Particularly in the European case, Kellogg defined very well how the company is going to operate. Kellogg Company (NYSE:K) will create two pan-European businesses instead of working with individual country managers. This should streamline operations and create synergies throughout the company (for example through shared advertising campaigns). All in all, Kellogg is facing correctly all the competitive and operational challenges it has been suffering. Its return to pre-2009 growth levels should empower Kellogg’s valuation. Currently selling at 15 times 2013 earnings and 10.7 times EV/EBITDA, this company may soon be an acquisition target.

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