Sector financial performance:

This company was grouped into breakfast cereals& snacks sector of bakery industry.

It seems that the recent sales volume of companies in this sector indicate that the demands for breakfast cereals had been weak (primarily from non-core products) and declining and the decline may be reaching its maximum and rebounding in 2018. Accompanying with the decline in volume, selling price of those products seems to have been rising. Our analysis indicates that this sector is very sensitive to price’s rising. Company will lose its market share if it significantly lags behind its peers in price reduction or promotion. However, our data also indicates that the competition did not come only from the competitors inside the category but came from alternative products of cereals because the lost market shares from one company did not directly go to another one. At the same time, demand from international market seems to keep strong and contribute most of increase for those companies in the past several years.

However, while it is very sensitive to rising price, as a mature market with stable but slowly growing demands it is not that sensitive to reduction of price. Therefore, since there is no better way to stimulate sales, companies have been focusing on productivity and management costs controlling to try to improve their margins and profits and it seems that companies have been doing well before 2017. However, increasing input costs seem to be causing upward pressure on price and hurting companies ‘profitability.  Companies have managed to improve their gross margins to average 34% (30-38%), operating margin to average 16% (14-17%), and cash flow margin to 8%.

Therefore, companies will firstly need to find the sensitivity of its products price to alternative products and competitors. As long as they find its sensitive point of price, companies’ performance may up to their brands loyalty and products’ innovation.

According our analysis, the sector’s ratios of enterprise price/adjusted EBI ranges 18-24, which present a decrease in multiples compared with 2016/17 caused by concern with consumption of cereal in future.

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Company performance:

It seems that the continuing decrease in demand for products of this company may reach its maximum in 2017 and may be rebounding as indicated by increasing volume number in 2018.

For first quarter of fiscal 2019 compared with same period of 2018(ended 20180826)

Organic sale increased 9% due to increase of 6% in volume and increase of 3% in price/mix.

For fiscal 2018 compared with 2017(ended 20180530)

Organic sale was flat due to decrease of 1% in volume offset by increase of 1% in price/mix.

The organic sales volumes of this company’s products have decreased by 7% (3% up in price), 3%, 0% in the past fiscal 2017, 2016, and 2015. While the decreases in volume were partially offset by increased price, it is a clearly signal that the demand of market is declining and pressure on price may get increasing. We see declining among almost all products categories of in US retail segment of this company including cereals, which presents the best performance compared others still decreased by 3% and 1% in sales in 2017 and 2016.

Gross margin as a percentage of sales had increased from 33.7% (2015), 35.2% (2016), to 35.6% (2017), which, under the help of decreasing SG&A%, contributed the growing operating margins from 15% (2015) to 18% (2017). However, due to increase in costs of raw materials its gross margin was pulled back to about 34% in 2018 and resulted in decrease of operating margin to about 17%. While offset by the reduced sales numbers, increased margins still help this company gain positive income and cash flow.

However, the increased margins probably are not what this company really wanted. It is very possibly a result that this company failed to reduce its products’ price when its peers did that as raw materials’ price fell. It is also a result that this company wrongly reduced its spending on marketing and selling without realizing that declining demands had a huge pressure on the price.

Stock price

This stock currently has an enterprise price/EBI ratio of about 23. Our valuation methods and analysis concluded that the market may currently be undervalued considering the likely rebounding in its traditional cereal sales..