Two Quarters After Kellogg's Spin-Off of Its Cereal Business to Focus on Snacks, the Initially Unloved Cereal Unit Surpasses Both the Market and Its Former Parent Company Significantly. The shares of WK Kellogg, the North American cereal division, have risen by nearly 75% since their first trading day as an independent company on October 2nd. Kellanova, the renamed company that sells products like Pop-Tarts and Pringles as well as international cereals, has gained approximately 16% in the same period, still lagging behind the S&P 500.

This corresponds to a common pattern in spin-offs. Shareholders often part with the shares of the company perceived as less attractive, which offers an opportunity for value-oriented investors to step in.

However, the recent quarterly results of both companies have reminded us why Kellanova was originally preferred. Last week, the snack company reported an organic sales increase of 5.4% compared to the previous year in the first quarter, which was faster than analysts expected and may indicate an outperformance of its annual forecast of about 3% growth.

WK Kellogg reported on Tuesday that adjusted sales in the last quarter fell by 0.8% compared to the previous year. The company reaffirmed its strategy to aim for flat sales while expanding margins through investments in a better supply chain infrastructure. Pricing and sales mix contributed 6.3 percentage points to revenue growth, while underlying volumes fell by 7%. In an investor presentation, it acknowledged that it continued to lose market share in the US cereal market.

For the full year, WK Kellogg expects an adjusted sales decline of 1% to an increase of 1% and an adjusted EBITDA growth of 3% to 5%.

This might have excited investors when the stock traded at just 6.5 times the expected earnings according to FactSet shortly after the spin-off. But after its rally, it is now valued at a multiple of 15.6. That's actually higher than General Mills at 15.0 times, despite the company's much stronger long-term record in terms of innovation and execution.

At 16.5 times the expected earnings, Kellanova is trading at a discount compared to snack rivals such as Mondelez and Frito-Lay owner PepsiCo, which trade at 19.6 and 21.1 times respectively. This discount could be justified by their status as established global giants.