Day: October 15, 2024

Corporate spinoffs can be an odd investment proposition. Often, when companies split up, one of the resulting businesses seems like the “desirable” asset to own, while the other gets spurned by investors. Typically, that unloved company is the one that winds up with the parent’s less exciting operations or the businesses with lower projected growth. Indeed, the performance gaps between stodgy business units and higher-growth ones are often used as key justifications for spinoffs.

However, as counterintuitive as it sounds, sometimes, when the market seems to want nothing to do with a newly spun-off company, that just makes it a more interesting investment option to me.

That’s now the case with WK Kellogg (NYSE: KLG) — the pure-play cereal business that was spun off a year ago from the former Kellogg, which renamed itself Kellanova. In August, privately held behemoth confectioner Mars agreed to acquire the snack-centric Kellanova. But WK Kellogg is still fending for itself — and it is being viewed skeptically by the market.

Here’s why I think that the market’s current disdain toward WK Kellogg positions it as an excellent buy for investors seeking out a lifetime of passive income.

The market doesn’t like the new Kellogg — and that’s perfect

WK Kellogg owns more than a dozen well-known cereal brands, but considers the following to be its “core six:” Frosted Flakes, Special K, Fruit Loops, Raisin Bran, Frosted Mini Wheats, and Rice Krispies. These big brands are responsible for its leadership position in the cereal industry alongside peers General Mills and Post. Those three companies alone are responsible for roughly three-quarters of total sales in the niche.

While this leadership position is excellent, Statista projects that cereal sales overall will only grow by 2% annually through 2029 — a tepid rate that has left the companies trading at sub-market valuations. However, WK Kellogg’s valuation, in particular, is deeply discounted — not just relative to the market but to its two main peers.

Following the company’s 29% dip from its previous highs set in May, WK Kellogg trades at a mere 11 times next year’s earnings, indicating that the market sees minimal growth potential. Just how little growth?

With management stating that it has historically converted 100% of its net income into free cash flow (FCF) on average over time, WK Kellogg would only need to grow by 2% in perpetuity to live up to this valuation. That means WK Kellogg would only need to maintain its share of the cereal industry to produce market-beating returns.

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But management has grander plans than just holding serve.

Over the next two years, it plans to invest roughly $500 million into modernizing and consolidating its supply chain, adding automation and new digital capabilities that could dramatically improve efficiency. Should these upgrades go according to plan, management believes its earnings before interest, taxes, depreciation, and amortization (EBITDA) margin — lately 9% — will improve to 14% by 2026.

Given that General Mills and Post have been achieving EBITDA margins of 20% and 16% already, I don’t believe 14% is out of reach for WK Kellogg — especially considering that it should be able to streamline its operations as a pure-play cereal unit. Should it land anywhere near this 14% margin, the company would fly past the 2% growth it needs to live up to its current valuation.

WK Kellogg’s passive income potential

Best of all for investors, despite its plan to spend heavily on those supply chain upgrades, WK Kellogg still intends to reward shareholders handsomely for their patience. Its dividend at the current share price has a generous 3.7% yield. But its dividend payouts will equal roughly 35% of the company’s projected net income, so the payout’s sustainability does not appear to be at risk.

However, with the company’s debt-to-EBITDA ratio expected to rise to 3 by 2026 as it spends on its supply chain, investors shouldn’t expect significant dividend increases over the next year or two. If its improvements go to plan, though, and WK Kellogg’s profitability rises by roughly 50% or more as projected, it will be well-positioned to engage in major dividend hikes over a decade-long time frame.

In addition to this passive income potential, WK Kellogg’s higher margins would also allow for it to pay down debt and consider tuck-in acquisitions of better-for-you cereal upstarts that could modernize its offerings. With natural and organic brands like Kashi and Naked Bear already in its lineup, WK Kellogg recently launched a new high-protein, zero-sugar, premium cereal called Eat Your Mouth Off.

Ultimately, investors who are interested in WK Kellogg will want to be laser-focused on its earnings reports over the next two years, monitoring those readouts to see whether or not its projected EBITDA margin growth takes place. Thanks to the company’s pure-play focus on cereal, I’m optimistic that it can get its margins closer to those of its peers — and maybe one day surpass them — which would make the stock at today’s price a steal.

While investors will need to have patience with this stock, WK Kellogg’s combination of a deeply discounted valuation, its leadership positioning, a hefty dividend yield, and the potential for higher margins make it a great candidate for those seeking a passive income stream that can last a lifetime.

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1 Magnificent Dividend Stock Down 29% to Buy Now for a Lifetime of Passive Income was originally published by The Motley Fool

Qualcomm Inc (NASDAQ:QCOM) stock is shooting upward after analyst Ming-Chi Kuo commented on the company’s Snapdragon 8 Gen 4 shipments.

The analyst noted that Qualcomm’s stock price has already factored in the negative impact of Apple Inc (NASDAQ:AAPL) developing its own 5G chips. The company is poised to benefit from better-than-expected momentum in the fourth quarter of 2024 and favorable trends in 2025, including AI smartphone and AI PC growth and increased System on Chip (SoC) prices due to the adoption of Taiwan Semiconductor Manufacturing Co’s (NYSE:TSM) 3-nanometer process, as per Ming-Chi Kuo.

Also Read: China Is Eating Apple’s Lunch: Where Smartphone Maker Ranks Vs Asian Competitors

According to the analyst, among Qualcomm’s mobile SoCs this year, the most expensive and profitable Snapdragon 8 Gen 4 (SD8G4) will see most of its 2024 shipments in the fourth quarter of 2024.

Ming-Chi Kuo noted that compared to SD8G3, SD8G4’s second-half 2024 shipments would likely increase 50% to 9 million units, with an ASP increase of 15% to $180, contributing significantly to fourth-quarter 2024 revenue and profit.

The analyst noted that the significant growth in SD8G4 shipments is attributed to a more extended shipping period, increased demand from Samsung, and recent Chinese smartphone market dynamics.

Chinese brand smartphones reached about 80% market share during the recent Golden Week holiday sales, with shipments growing 20% (versus iPhone, which was flattish), which will likely continue through the fourth quarter of 2024, Ming-Chi Kuo said.

As per the analyst, the market share of high-end smartphones (above 4000 RMB) in China will likely grow from 25%–30% in 2023 to 30%–35% in 2024.

He added that Chinese smartphone market shipments will likely grow by 3% to 280 million units in 2024, and continued growth is likely in 2025.

Price Action: QCOM stock is up 3.32% at $175.63 at last check Monday.

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(Bloomberg) — Ryan Xu was a dream customer for Germany’s automakers. The Guangdong-based entrepreneur and her husband own a Porsche 911 and a Mercedes-Benz G-Class and were among the first buyers of the electric Porsche Taycan.

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But her views on German cars have soured as Chinese consumers increasingly favor tech refinement over traditional selling points like horsepower and handling. The software systems in the Taycan, which costs well over $100,000, were “terrible,” the 36-year-old mother of three said. It was “just an electrified Porsche — and that’s it.”

Her assessment isn’t isolated. As China moves away from combustion-engine cars, Volkswagen AG, Mercedes-Benz Group AG and BMW AG are struggling to offer electric vehicles that appeal to customers in their largest and most lucrative market, putting €35 billion ($38 billion) of investment on the line.

The latest warning signs came last week, when all three German manufacturers reported slumping third-quarter sales in China. BMW posted its steepest sales drop there in more than four years, a 30% plunge, and Mercedes’ deliveries declined 13% amid poor demand for its priciest cars, including S-Class and Maybach limousines.

Porsche’s sales in China tumbled 19% to its worst third-quarter performance in a decade as global demand for the Taycan nearly halved. Volkswagen — the parent of Porsche and Audi — reported a 15% decline. “The competitive situation in China is particularly intense,” said Marco Schubert, who oversees sales for VW.

After dominating the gas-guzzler era, German manufacturers became complacent, underestimating the threats posed by new rivals and reluctant to abandon the profits generated by big-engine cars. That allowed Tesla Inc. and local manufacturers led by BYD Co. to speed by with tech-savvy and affordable plug-ins, and now China no longer needs or wants them there.

“The turning point is happening now for these automakers,” said Stephen Dyer, a Shanghai-based managing director at consultant AlixPartners. “They need to dramatically change their strategy in the market.”

The next challenge is already on display at this week’s Paris auto show, where Chinese manufacturers are stepping up their efforts to take market share in Europe. Companies including BYD and Xpeng Inc. will showcase their latest technology at the biggest European car event this year.

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At least one response effort didn’t go as planned. The microphone and slide show cut out for several minutes in the midst of Volkswagen’s presentation about future electric vehicles, leaving sales and marketing chief Martin Sander visibly frustrated.

It’s an emotion shared by drivers in China. After dealing with braking and other quality issues, the Xu family sold their Taycan and bought an ET5 from Chinese brand Nio Inc. The car was about a third cheaper than a Mercedes EQE, which Xu also considered, but offered a more luxurious interior design, smooth voice controls, and greeted their kids by name as they climbed in.

“German cars can hardly match” that level of technology, said Xu, who runs a business with her husband. Mercedes, BMW and Audi “can hardly be seen as luxury cars now.”

While German automakers still control nearly 15% of the Chinese market, that’s down from a quarter before the pandemic and worse yet, their share of EVs is less than 10%. Without a quick turnaround, the slump risks turning into a rout and tipping German’s Big Three into an existential fight. As it is, VW, Mercedes and BMW are each only worth about half of BYD’s stock-market value.

Even more than other international peers, Germany’s automakers have gone all in on China. While some rivals have cut their losses, the Germans aren’t giving up, shifting more resources in an effort to claw back market share. But it looks like an uphill fight as Beijing actively seeks to build up its own manufacturers.

Volkswagen plans to play the long game. A spokesperson for the Wolfsburg-based company said the Chinese car market has been marked by steep discounts, and it wouldn’t buy market share at the expense of profitability.

The company plans to continue its “in China, for China” strategy to protect its long-term prospects. BMW and Mercedes are also planning to stick with a localization approach to appeal to buyers there.

The reasons for doubling down are clear. With Europe’s auto market probably past its peak and the US saturated, there’s no viable alternative to China for a similar level of volumes and profits.

That raises concerns given their massive footprint in China. As a group, Germany’s carmakers operate a network of over 40 factories — more than in their homeland. That’s too much investment to simply give up on — and explains why they oppose the European Union’s plans to levy tariffs on China’s cheap electric cars.

Pulling out of China — as General Motors Co. and smaller Japanese brands Suzuki Motor Corp. and Mitsubishi Motors Corp. have done — is almost unthinkable. And any restructuring would be complicated, given the operations are caught in a complex web of relations with government entities. That puts the focus on developing the kinds of features that Chinese customers want.

Urgency started to intensify in late 2022. After Volkswagen’s China chief Ralf Brandstätter warned the supervisory board that Chinese carmakers had leaped ahead, the company then chartered flights to send hundreds of staff to the Shanghai auto show in April 2023 — the first installment after years of Covid lockdowns — to see for themselves.

It was a sobering reality check. The German executives were confronted with a rapid rollout of affordable Chinese models, tech-loaded products and an intensified price war. There was also a slew of gimmicky innovations like a hopping sports car and in-car karaoke, which may have been quirky but reset the bar for Chinese consumers about the source of automotive trends.

Since then, there has been an intense competitive response. A few weeks after the auto show, VW Chief Executive Officer Oliver Blume ousted the head of software unit Cariad in the latest effort to accelerate and improve technology. Alongside new Chinese partnerships for autonomous driving, infotainment and user experience, VW also invested in Guangzhou-based Xpeng to underpin a plan to build cars using the startup’s EV expertise.

After a profit warning in September, one of the first actions by Mercedes CEO Ola Källenius was to fly to China to check on progress in reshaping its presence there including tapping CATL for batteries and Tencent Holdings Ltd. for digital services. BMW responded by joining forces with Great Wall Motor Co. to build EVs for its Mini brand.

The cumulative result is that German cars will become progressively less German in their largest market. The expansion is also exactly the opposite of the government’s aim to reduce exposure to China, according to Gregor Sebastian, an analyst at Rhodium Group.

Clinging to their position in China is “a huge gamble,” he said, noting that the German state might need to bail them out if it all goes wrong. “They’re hoping they’re too big to fail.”

While Chinese consumers eagerly bought up German cars for years, the market has changed and reclaiming that enthusiasm from a clientele that’s younger, more tech-oriented than in Europe is a major challenge. With the switch to electrics, local brands have shown they can match VW, BMW and Mercedes on quality and beat them on price and technology.

What that means for Germany can be seen inside a production hall at Mercedes’ Sindelfingen site near Stuttgart. It’s home of the flagship S-Class, long a favorite of China’s nouveau riche. But demand has slumped and production has been reduced to a single shift for the first time.

While cost-cutting has started to roll over Germany’s auto industry — most notably with VW’s threats to close factories in its homeland — Chinese operations are still insulated. It’s a sign that executives are hopeful for a turnaround. But they also have little choice.

Downsizing operations in China is difficult because large-scale job cuts often need to be discussed with domestic partners and approved by local authorities, which have little incentive to be cooperative. More drastic changes like shutting a plant is even harder.

Land in China is owned by the government and that means a factory can’t simply be shuttered and sold — even if a buyer could be found. The case of Hyundai Motor Co.’s exit from a plant in Chongqing illustrates the risk. After several attempts to sell the factory building and the machinery, the Korean carmaker ultimately accepted an offer from the local state-operated industrial zone for a fifth of its investment.

That puts pressure on Germany’s carmakers to revive sales, but the playing field has tilted in favor of domestic players. Beijing has directed several key state-owned automakers, including VW partner FAW Group, to prioritize technology and market share over profitability. That’s hardly an option for Germany’s publicly-listed carmakers.

Despite the structural headwinds, the downturn might have been prevented by more forward-looking investment in the Chinese market. But after decades at the pinnacle of the auto industry, Chinese rivals weren’t taken seriously and local insight was bypassed as decisions were funneled through boardrooms thousands of miles away.

There also wasn’t enough attention paid to the fact that the switch to EVs was about more than swapping out one powertrain for another, and early software was buggy. For instance, VW only managed to turn on over-the-air updates years after launching its first Chinese electric model in 2020.

That meant owners had to send their cars to dealers for in-store upgrades — which could at times take days. To overcome resistance, some dealers offered cash incentives to encourage customers to fix faults.

Zhou, an IT engineer living in Wuhan, had to endure the frustration after buying an ID.4 in early 2022. With screens going black several times in the middle of driving, he got glitches instead of German quality. Updates were also regularly behind schedule or available only via the dealer.

He’s now seeking a replacement. It will be another EV, but this time “I won’t visit any German dealerships,” he said. “I’ll only go for local brands, or Tesla.”

–With assistance from Stefan Nicola and Monica Raymunt.

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James Howells, etched in the history books for accidentally discarding Bitcoin (CRYPTO: BTC), which is worth more than half a billion dollars today, took a major step in retrieving them.

What Happened: In a last-ditch effort, the Wales-based software engineer filed a lawsuit against Newport City Council for roughly 495.31 million British pounds, or about $647 million, in damages for repeatedly denying his request to excavate the landfill site housing the discarded hard drive, which contains around 8,000 units of Bitcoin, as reported by WalesOnline.

Howells explained that the lawsuit is a strategy to convince the council to allow an excavation of its landfill, not a reflection of the actual situation.

See Also: Groundbreaking trading app with a ‘Buy-Now-Pay-Later’ feature for stocks tackles the $644 billion margin lending market – here’s how to get equity in it with just $500

Howells has assembled a team of specialists to carry out the excavation at no cost to the council. He has also proposed to give the council 10% of the recovered coins’ value.

The case is set for a hearing in December. Newport Council, however, has dismissed the lawsuit as “weak” and expressed concerns over potential environmental impacts of the proposed excavation.

Why It Matters: The bizarre case dates back to 2013 when Howells unintentionally put a hard drive containing 8,000 BTCs in the trash while cleaning his office.

The compensation that Howells sought was the peak valuation of the stash from earlier this year when the leading cryptocurrency spiked to a new all-time high.

As of this writing, 8,000 BTCs are worth $514.37 million, at a market price of $64,296.34 per unit.

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• “The Black Swan” author Nassim Taleb says he’s focused on hedging against a market collapse.

• He said the market is flashing parallels to prior crashes, noting that it is the most fragile in 20 years.

• He pointed to risks like high debt levels and “crazy” stock prices in an interview with Bloomberg.

A top economist and risk expert says the US is in one of the most precarious investing environments in decades — and while some investors are cheering on the rally in stocks, he has his eye on a potential market collapse.

Nassim Taleb, author of “The Black Swan,” the famed treatise on the risks related to improbable events, aired concerns over the state of the market in a recent interview with Bloomberg.

The environment, he said, mirrors prior crashes, and he added that he was focused on preparing for such an event.

“We have a lot of risks building up,” the Universa Investments advisor told Bloomberg on Friday. “I would say that … my focus would be more on being hedged against an eventual market collapse because we’re more fragile than we were probably at any point in the last 20 years, if not, you know, 30 years,” he later added.

Taleb pointed to a handful of risks looming over the market despite the bullish backdrop for stocks over the past year.

Stock prices look “crazy,” he said, noting that most of the S&P 500’s rally has been concentrated in a small pool of companies linked to artificial intelligence.

Yet, it’s unclear if those companies hold the most growth potential, he said, pointing to the rotation of top-performing companies during the dot-com bubble.

“AI is going to be the best investment. But maybe not at these firms,” he said.

Meanwhile, the US economy has been “confusing,” with uncertainty over whether some sectors are overheating, Taleb said.

World economies are also more dependent on each other, thanks to increased globalization since the pandemic. That means foreign shocks are more likely to spread, he noted, another factor that complicates the investing environment.

The West is also holding on to more debt “than we can handle,” Taleb said, with the debt-to-GDP ratio in the US notching 124% at the end of September. If high debt levels are combined with an external shock, that could result in a “death spiral,” Taleb has previously predicted.

Meanwhile, investors are coming out of a period dominated by lower interest rates. Many market participants are used to steering away from more “conservative” assets, and that risk-on attitude could put traders in a vulnerable position, he suggested.

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“These crises happen when you expect them the least,” Taleb said. “And I think we’re very similar to the environment we’ve had in previous collapses, and the market becomes complacent. People are used to it. They might have some precaution in the beginning, but then they throw precaution to the wind … and that’s when the vulnerability is going to be at its maximum.”

Universa Investments is technically “market blind,” Taleb said, as the firm employs an investment strategy that disregards short-term market forecasts.

Taleb and other forecasters at the firm, though, have repeatedly issued downbeat predictions on stocks and the economy over the short term. Mark Spitznagel, Universa’s founder, said earlier this year he foresaw the S&P 500 entering a “face-ripping rally” before seeing the worst crash since 1929, thanks partly to precarious conditions brewing in the credit market.

Read the original article on Business Insider