Options volume jumped last month and the cost of bullish contracts is the highest since 2007 relative to bearish ones, according to data compiled by Bloomberg. Among the 10 options with the highest ownership, seven were bullish. The shares have climbed 18 percent since the start of February as traders bet the maker of Corn Flakes and Pop Tarts would be acquired.
Buffett told shareholders this month that his company is looking for a large takeover with 3G Capital, the buyout firm he teamed up with last year for the acquisition of ketchup maker H.J. Heinz Co. Kellogg is a good candidate for Omaha, Nebraska-based Berkshire, according to Edward Jones & Co.’s Brian Yarbrough.
“The reason there would be interest for Buffett is that it’s a basic business,” Yarbrough, an analyst covering consumer stocks for Edward Jones, said in a phone interview from St. Louis. “It’s a very consistent business. It’s decent in bad times, it’s decent in good times. It generates a lot of cash flow, and they like that.”
Buffett said this month he is looking for purchases to put to work the $48.9 billion of cash his holding company has, adding that he’d welcome more deals with 3G. Buffett, 83, has said over the years that he prefers simple businesses that he understands and that have good returns on equity with consistent earnings.
Kris Charles, a spokeswoman for Kellogg, said the company does not comment on stock activity. Buffett didn’t return a message left with an assistant seeking comment.
Puts protecting against a 10 percent decline in Kellogg shares cost 0.95 point more than calls betting on a 10 percent gain, according to three-month data compiled by Bloomberg. The price relationship reached 0.27 last week, the lowest level since May 2007.
Traders own more Kellogg bullish options than bearish ones. The number of outstanding calls more than doubled since the end of March to 64,450 contracts on May 9. That compared with a 62 percent increase to 40,494 for puts, data compiled by Bloomberg show.
The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options prices known as the VIX (VIX), fell 5.3 percent today to 12.23, the lowest level since January. The VStoxx Index, its European counterpart, slipped 2.5 percent to 16.25.
Kellogg, along with Kraft Foods Group Inc. (KRFT) and General Mills Inc., may match the criteria Buffett has said he targets when he evaluates potential acquisitions, according to data compiled by Bloomberg. They are all valued at more than $20 billion before debt and a takeover premium. Kellogg has a market value of $24.6 billion.
Kraft is unlikely to offer Buffett and 3G the international presence they found appealing in Heinz, as it gets most of its revenue from North America, Yarbrough said. With General Mills, there is greater speculation of a bid by Nestle SA, which it has a joint venture with, he said.
To counter a drop in cereal sales as consumers opt for protein-laden breakfasts, Kellogg will invest money educating buyers about the proteins present in milk and cereal, Chief Executive Officer John Bryant said in a conference call on May 1. In November, he embarked on a four-year plan designed to save as much as $475 million annually by 2018.
While the company’s strategy is a step in the right direction, Kellogg faces challenges, according to Kenneth Zaslow, an analyst at BMO Capital Markets Corp.
The company’s “execution, including innovation, has been far from consistent,” Zaslow wrote in a May 2 note. He has a market-perform rating on the stock, similar to neutral. “Reenergizing the cereal category may prove more challenging in light of the potential breakfast substitutes.”
The food industry is seeing its share of acquisitions. Sausage maker Hillshire Brands Co. said yesterday it will buy Pinnacle Foods Inc. for about $4.3 billion. The offer is almost 20 percent higher than Pinnacle’s previous closing price.
Kellogg had a profit margin of 12 percent in 2013, beating the 9.5 percent for Standard & Poor’s 500 companies, according to data compiled by Bloomberg.
“This is a cash-cow kind of company,” Christopher Rich, head options strategist at JonesTrading Institutional Services LLC in Chicago. “Berkshire looks in this direction for cash-cow kind of companies they understand and they think they can grow.”
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