Morningstar 2011/2012 - (Page 41)

+ 1 866 374 – 8800 global.morningstar.com 41 Morningstar Corporate Credit Research Objective corporate debt research and ratings. ® 3 Coverage of global companies, including banks and captive finance subsidiaries 3 Direct access to underlying models and assumptions advantages, free cash flow, business risk, and overall financial health. Available to portfolio managers and institutional investors, our credit research reports feature credit comparables, issue commentary, and a comprehensive overview of a company’s capital structure. Enhanced credit notes deliver timely insights on new bond issuances and corporate actions. Ratings include market-based measures and are monitored constantly to respond to changes in credit quality. We provide clients with full access to underlying analyst forecasts and financial models, so they can explore our process or generate their own assumptions. Our credit analysts and industry specialists are also available directly by phone or email to discuss their ideas. Financial advisors can access Morningstar corporate credit research and ratings through Morningstar ® Analyst Research Center (see p. 21). Our straightforward analysis helps advisors surface new investment opportunities and build recommendations for clients. Morningstar corporate credit ratings are also available to individual investors through Morningstar.com.® SM With an emphasis on transparency and independence, Morningstar offers credit ratings and analysis for more than 700 of the largest corporate bond issuers worldwide, including global banks and captive finance subsidiaries. Our forward-looking methodology evaluates companies using both qualitative and quantitative measures that highlight key competitive Read about our corporate credit rating methodology global.morningstar.com/CreditResearch Morningstar Corporate Credit Ratings and Research Morningstar’s Credit Rating Process 1 Competitive analysis of a company’s strengths and long-term sustainability within its industry Cash ﬂow forecasts that consider ﬁnancial statements and competitive dynamics to help predict ﬁnancial distress Scenario analysis modeling bull and bear cases to derive alternate estimates of enterprise value Quantitative checks built on our backtesting and academic research to help gauge a company’s health Resulting Metrics Morningstar Corporate Credit Research Morningstar ® Economic Moat Rating TM Kellogg Company K (NYSE) Business Risk Cash Flow Cushion™ | ADistance To Default Economic Moat™ Industry Group Sector Solvency Score™ Good Poor Fair Very Good Narrow Consumer Packaged Consumer Goods Defensive Credit Metrics (USD Mil) Cash and Equivalents Total Debt Interest Expense EBITDA Debt to Book Capital Quick Ratio Debt to EBITDA EBITDA to Interest Expense Higher Costs, Increased Brand Investments Weigh on Kellogg's Proﬁts; Shares Fairly Valued See Page 6 for the full Analyst Note from 04 May 2011 2009 2010 2011(E) 2012(E) 2 Morningstar Cash Flow Cushion TM ® Morningstar Credit Committee credit@morningstar.com Credit Perspective 10 Mar 2011 Committee members voting on rating do not own securities issued by the company. Credit Analysis as of 06 May 2011 Business Analysis as of 06 May 2011 Estimates as of 04 May 2011 Currency amounts expressed with “$” are in U.S. dollars (USD) unless otherwise denoted. 3 Business Risk Contents Summary Credit Analysis Business Analysis Analyst Notes Morningstar Analyst Forecasts Comparable Company Analysis Methodology 1 2 4 6 8 11 12 Intense competition in the cereal aisle and negative impact from Kellogg’s recent cereal recall weighed on sales and proﬁtability. We believe efﬁciency improvements, marketing investments, and product innovation will ultimately beneﬁt Kellogg, offsetting these near term pressures. In addition, under recently-appointed CEO John Bryant, Kellogg is placing an emphasis on regaining its momentum. While we're encouraged by this renewed focus, we don't expect measurable improvements overnight. That said, we continue to believe that Kellogg's portfolio of value offerings should appeal to cash-strapped consumers who are increasingly dining at home. We view Kellogg as having a narrow economic moat, resulting from the strength of its brands as well as the scale beneﬁts that result from its global network. Kellogg's leverage is typical for the packaged foods group, and proﬁtability held up remarkably well despite the weak economy. Due to signiﬁcant debt repayments over the next few years, we forecast Kellogg's cash ﬂow generation will only slightly exceed total cash commitments. However, given Kellogg's relatively low free cash ﬂow variability, this modest ratio is more robust than it might otherwise appear and, in our view, affords debt investors a sufﬁcient margin of safety. We capture Kellogg's low cash ﬂow variability in the more qualitative Business Risk component of our credit rating. Here Kellogg scores very well due to a demonstrable economic moat, wide customer/product diversity, and low cyclicality. Historically the company has operated with a prudent amount of leverage, which we expect to continue. We forecast debt leverage will average 1.7 times over our forecast period and interest coverage averaging 9 times. We project the ﬁrm will increase its dividend by approximately 5% annually over our forecast period and will use excess free cash ﬂow to repurchase stock. 334 4,880 302 2,385 0.7 0.6 2.0 8.1 444 5,904 244 2,382 0.7 0.5 2.5 9.6 127 5,455 278 2,463 0.7 0.5 2.2 10.1 131 5,274 259 2,591 0.7 0.5 2.0 8.6 Operating Summary (USD Mil) 2009 2010 2011(E) 2012(E) Sales % Change EBIT % Net Sales Net Income % Net Sales Free Cash Flow % Net Sales 12,575 -1.9 2,001 15.9 1,212 9.6 2,069 16.5 12,397 -1.4 1,990 16.1 1,247 10.1 507 4.1 12,693 2.4 2,069 16.3 1,284 10.1 1,416 11.2 13,119 3.4 2,184 16.7 1,326 10.1 1,504 11.5 Capital Structure 4 Morningstar ® Solvency Score and Distance to Default 76.7% 95.0% 80.3% TM 23.3% Current 19.71 Bil — 5.98 Bil 5.0% Prior Quarter 18.81 Bil — 996 Mil 19.7% Prior Year 20.33 Bil — 4.97 Bil Market Equity Preferred Debt Source: Morningstar Issuer Proﬁle Founded in 1906, Kellogg is a leading global producer and marketer of cereal, cookies, crackers, and other convenient foods. The ﬁrm's offerings are manufactured in 18 countries and marketed in more than 180 countries. Its product portfolio includes well-known brands such as Special K, Frosted Flakes, Corn Flakes, Rice Krispies, Pop-Tarts, Eggo, Keebler, and Morningstar Farms. International sales account for about one third of the ﬁrm's consolidated total. Rating committee review of analyst assumptions by senior Morningstar personnel Morningstar ® Corporate Credit Rating TM © Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. Page 1 of 13 Corporate Credit Research Report http://global.morningstar.com http://www.Morningstar.com http://global.morningstar.com/CreditResearch

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Morningstar 2011/2012
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