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Why Shares of WK Kellogg Skyrocketed Today

Source The Motley Fool

Shares of leading cereal marker WK Kellogg (NYSE: KLG) were up 11% as of 3:30 p.m. ET Friday, according to data provided by S&P Global Market Intelligence.

The surprising share price spike stems from rumors that Kellogg could potentially be acquired by the privately owned snacking behemoth Ferrero Group from Italy.

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While it is always challenging to discern the legitimacy of merger and acquisition (M&A) speculation, these two food companies have a history of making deals with each other.

Kellogg may be an interesting stock -- regardless of the rumors

Spun off from its parent company, now Kellanova, in 2023, Kellogg became a pure-play cereal manufacturer in North America. Despite controlling the vast majority of the North American cereal market alongside mega-peers Post and General Mills, Kellogg is viewed as a turnaround value stock thanks to its exclusive focus on cereal -- a slow-growth market.

However, because of its focus on making cereal, Kellogg grew its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by 7% in 2024 as it streamlined its operations. This growth leaves the company trading at just 7 times next year's EBITDA -- a deeply discounted valuation that seems to have caught Ferrero's attention.

Famous for its Nutella, Kinder, Tic-Tac, and Ferrero Rocher brands, Ferrero's snacking focus may not seem to match Kellogg's cereal prowess. However, Ferrero did buy the Keebler and Famous Amos brands from Kellogg in 2019 for $1.3 billion, so it is reasonable to say that these rumors are not entirely smoke.

While it is too early to tell if this deal is being seriously considered, Kellogg, with its 3.2% dividend yield, remains an intriguing turnaround investment regardless of what happens with these rumors. Now, given Ferrero's interest, I know I'm not alone in these thoughts.

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