Here is an easy investment question: What goes snap, crackle and pop and might be an excellent addition to your portfolio? If you answered Kellogg's Rice Krispies, you were partially right. Cereal makes for a soggy investment but Kellogg, on the other hand, bears investigation.

Looking back a year, Kellogg (Ticker: K) has been steadily improving its cash conversion cycle, or the days it takes to convert raw materials into cash, bringing it down by four days in fiscal 2004 to an average of 26 days overall.

Kellogg's free cash flow, defined as cash from operating activities less capital expenditures, has not only exceeded its net income for the past six years but increased 3 percent to $950 million in fiscal 2004. In that year, Kellogg also paid out $418 million in dividends, bought back 7.3 million shares of stock and paid down its debt by $286 million.

Moving ahead to the first quarter of this year, earnings came in at 61 cents per diluted share, a 15 percent increase over the same period a year ago. Meanwhile, net sales increased 8 percent to $2.6 billion. Internal net sales, which exclude foreign currency translation, increased 6 percent.

Digging a little deeper into Kellogg's financials, operating profit increased 11 percent to $468 million. Higher net sales, improved product mix and productivity savings not only contributed to the company's growth but were more than enough to offset the negative impact of increased benefit costs and the investments made to increase efficiency and enhance brand building.

Free cash flow was $169 million in the first quarter. The decline from the comparable $211 million a year ago was primarily due to an interest payment of $112 million. The comparable payment a year ago fell in the second quarter.

In its forward looking guidance, Kellogg stated that it now expects full-year earnings of between $2.28 and 2.32 per share. However, the company also indicated that its full year 2005 estimate for upfront costs related to cost reduction activities will be about 15 cents per share. The previous projection had been for 8 to 10 cents per share.

Wall Street also appears to like Kellogg. For example, on June 1, Terry Bivens, an analyst at Bear Stearns, wrote that he was raising his target price on Kellogg's shares to $55 from $50. The increase came on the heels of a new Bear Stearns consumer survey that indicated "an increase in Americans' consumption of ready-to-eat cereals is at hand."

Bivens also is of the belief that the new USDA dietary guidelines, which recommend eating more whole grains, should help drive that growth. "Our survey indicates a strong awareness of the benefits of whole grains and cereal's position as a key provider," Bivens wrote.

Given all of that, how does Kellogg's intrinsic value shape up? For a first cut I used an initial earnings number of $925 million and an earnings growth rate of 14.94 percent (the company's three-year average rate). If you then discount the results back at a rate of 11 percent (average return of the S&P 500), your net present value for the company's next 10 years of earnings is $11.3 billion.

Beyond the 10th year, if you lower the earnings growth rate to 6 percent and increase the discount rate to 12 percent, the result is a net present value of $23.2 billion. (The exact formulas are available on RuddReport.com.)

If you then add those two figures together, subtract the long-term debt of $3.89 billion and divide by the 411 million outstanding shares, the result is a per-share intrinsic value of $74.27.

Using the price/earnings approach, if you multiply my current FY 2005 earnings estimate of $2.34 per share by the current trailing 12-month price-to-earnings ratio (P/E) of 21, you have a result of $49.14 per share. On Friday, Kellogg's shares closed at $45.52.

So what does all this tell you? To begin with, you have the potential for a minimum of a 8 percent gain over the next six months (14 percent annually). Furthermore, in my opinion and you may disagree, the stock probably has excellent potential for another 15 to 20 percent gain over the next 12 to 24 months.