WK Kellogg’s New Sale at Goldman Sachs Following Spinoff

Goldman Sachs has begun coverage of WK Kellogg Co with a Sell rating and a price target of $11.00, following the recent spinoff of Kellogg Company’s North American cereal business.

The shares of WK Kellogg experienced a significant drop, finishing more than 15% lower after the spinoff.

Although Goldman Sachs sees potential for short-term margin improvement due to favorable input costs, the firm believes that productivity initiatives will be more effective toward the end of fiscal 2026. These initiatives are expected to depend on the rationalization of the manufacturing network, currently hindered by a moratorium on plant closures established with unions in late 2021, which will expire in 2026 during contract renegotiations.

Additionally, WK Kellogg faces challenges from sluggish demand and competition for market share. As a result, the firm projects that WK Kellogg’s near-term EBITDA forecast will remain fairly stable until the end of fiscal 2024.

Goldman Sachs highlighted that net debt is expected to increase by over $200 million during this period, posing a significant headwind to equity value, equating to more than 17% of the current market capitalization. This situation is anticipated as free cash flow turns negative and debt is incurred to support capital expenditures and dividends.

Given these considerable obstacles, Goldman Sachs believes that WK Kellogg’s stock will struggle to gain value, leading the firm to recommend that investors sell their shares.