During downturns in the business cycle, companies focus on cutting costs as it becomes more difficult to grow sales. Existing customers generally spend less and it is very challenging to find new customers when everyone is battening down the hatches.

The severity of the current downturn could mean that sales growth could easily remain depressed for much longer than expected. So far, large corporations are performing admirably by cutting the fat wherever they can. Eventually, though, many will have cut costs to the bone and will need revenue increases to sustain profit improvements.

Unless, of course, reigning in costs is part of your corporate culture.

Kellogg (NYSE: K) has been leveraging single digit sales growth into double-digit earnings increases for at least a decade now. Unfortunately, short-term issues have sent its shares into deep value territory.

For starters, Kellogg reported a disappointing fourth quarter. Sales fell more than analysts had expected and the company lost some market share in the United States. The company also issued a cereal recall that’s expected to dent profits more than anticipated. Because of these events, the company lowered its full-year guidance and now expects earnings growth between +8% and +10%. The shares fell nearly -9% after the earnings release and remain more than 11% off their highs for the year..

But this is where the current opportunity exists. These short-term issues have put Kellogg’s shares on sale. And as a major global food company, it offers defensive characteristics along with upside potential.

The long-rumored demise of its core cereal sales has been greatly exaggerated. The company has survived the onslaught of more convenient breakfast alternatives such as lattes, espressos and even less healthy drive-thru breakfasts, and as many time-strapped consumers just skip the most important meal of the day. It should come out of these most recent problems just fine.

Kellogg breakfast cereals hold a leading market share of more than 30% and have been able to stay relevant in the face of private-label brands from grocery stores and other big-box retailers. This is attributed to constant product innovation, which has kept storied cereal brands including Special K, Frosted Flakes and Rice Krispies relevant. Expansion into snack bars and other products has also created boosted demand.

A massive $1.1 billion advertising budget in 2009 is another competitive advantage that helps Kellogg stand out among its peers. Cost-saving programs are also constant: the most recent started in 2009 and should cut $1 billion in costs during the next three years.

Sales are stable and steadily increase in the mid-single digits each year. This combined with cost cutting means impressive capital generation. Last year, Kellogg generated $1.2 billion in earnings and almost $1.3 billion in free cash flow. This left excess capital to support a very respectable 3.2% dividend yield and the repurchase of $187 million in shares. The company has bought $1.4 billion in stock in the past two years, and indicates that repurchase activity should rebound once management is more comfortable with capital markets.

Action to Take –> Given Kellogg’s stellar track record over the years, I think the current trends are short-term in nature and will prove a blip in the company’s consistent track record. Kellogg’s forward P/E now stands at 14.5, which wouldn’t normally qualify as a screaming bargain, but is actually compelling for this stock — it stands near the market average of 15, below the industry average of more than 17, and is also below the company’s 5-year average multiple of nearly 18.

At the end of the day, cash flow generation is what matters. The stock is fairly valued at current prices if Kellogg can grow free cash flow a little over +9% each year during the next five years. But I think it can do this for another decade, which would mean the shares are undervalued by about -35%. Throw in a decent dividend yield and defensive characteristics, and Kellogg makes for a good long-term holding.