Kellogg Benefits From Brand Loyalty

By Sham Gad | November 02, 2009 AAA

Kellogg's (NYSE:K) third quarter results reveal that brand loyalty really does matter. Despite a quarter of flat sales growth, Kellogg managed to boost its net profit by 6%. That's a fantastic quarter, and mirrors the way that consumer giant Procter and Gamble (NYSE:PG) performed in its fiscal first quarter.

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No Substitute for Your Favorite Cereal
Apparently saving 50 cents or so was not enough to entice people to buy cheaper cereal, as sales of Kellogg's brand name products like Rice Krispies and Special K cereal remained strong. This an excellent competitive advantage to have. There's no doubt that it is aided by the fact that cereal is a relatively inexpensive good. This is very similar to the brand loyalty of Coca-Cola (NYSE:KO), where loyal drinkers aren't going to drink something else to save the relatively small difference between the two.

Blue Chip Advantage
With this year's rally having been more generous to the share prices of smaller, and often inferior companies, I've now assumed the viewpoint that larger blue-chip type quality companies are fantastic places to put your money to work considering the economic uncertainties that lie ahead. Both P&G and Kellogg, two blue chips that provide more essential consumer products, are reporting great numbers considering the environment and both are now more confident about the future. (For more, see The Value Investor's Handbook.)

Quality Still Rules
I would not take this to mean that all business forecasts will be this way. In fact, over time, we may begin to see a decoupling where the quality names continue to gain market share and deliver solid profitability while the rest have a tougher time of things. Quality does not have to necessarily mean large multi-billion blue chip, although as an asset class these names trade at very attractive valuations relative to the overall market. Zinc producer Horsehead Holding (Nasdaq:ZINC) should be able to hold its own, for example. It's a $340 million company with $70 million in cash and has one main advantage: it produces zinc at an extremely low cost.

Bottom Line: It Comes Down to Jobs
Despite these favorable outlooks, the economy as a whole will remain crippled without some meaningful signs of job creation over the next year. If that remains the case, don't take earnings from non-discretionary companies that all well for the U.S. economy. (For further reading, see Earnings Quality Means Everything.)

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