Goldman Sachs initiated coverage on WK Kellogg Co (NYSE:KLG) with a Sell rating and a price target of $11.00 following the completion of Kellogg Company's (NYSE:K) spinoff of its North American cereal business into the WK Kellogg standalone entity.
WK Kellogg saw a notable decline in its shares post-spinoff, closing more than 15% lower today.
While Goldman Sachs anticipates the potential for short-term margin expansion due to favorable input costs, it believes that productivity programs are likely to be more concentrated toward the end of fiscal 2026. These initiatives are partly dependent on a rationalization of the manufacturing network, which is presently impeded by the plant closure moratorium that the company entered into with its unions in late 2021. This is set to expire in 2026 when the contract undergoes renewal.
Adding to these challenges is a backdrop of weak demand and market share challenges. As a result, the bank anticipates that WK Kellogg’s near-term EBITDA forecast will remain relatively stable until the end of fiscal 2024.
“We expect net debt, however, to rise by over $200 mn over that duration, thereby creating a $200+ mn headwind to its equity value (17% of current market cap and assuming a constant EV/EBITDA multiple) as FCF turns negative and debt is raised to fund capex and its dividend,” mentioned Goldman Sachs.
Considering these substantial challenges, the firm holds the belief that the stock will face difficulties appreciating under these conditions and therefore recommends investors sell the stock.