EUR 850.00 For Business Accounts Only

Morningstar | Macro and Competitive Headwinds Abound for No-Moat Post; Shares Look Rich. See Updated Analyst Note from 23 Apr 2019

We’re modestly lowering our fair value estimate for no-moat Post to $92 from $93, driven by lower cereal revenue, partially offset by higher margins. Our consolidated revenue growth assumption falls to 2% from 3% as efforts to stabilize the cereal category have fallen short. We are therefore reducing our cereal expectations from modest growth to 0.5% declines in the U.S. and 2% declines internationally, in line with category trends. Given the firm’s lack of a competitive advantage, we think it is unlikely its brands will grow at a pace faster than the category averages. We are boosting our cereal operating margin forecast to 21% in the U.S. from 18%, and 24% internationally from 20%, as Post undergoes aggressive cost-cutting efforts to right-size these businesses for a more modest opportunity. Our consolidated operating margin increases to 14% from 13%. Given the steep valuation of these shares, which are trading about 20% above our fair value estimate, we suggest investors looking for value in the cereal aisle turn to wide-moat Kellogg or General Mills.

We believe a competitive advantage remains elusive for Post, as its businesses have not demonstrated pricing power or broad market dominance and its second largest category, egg products (28% of revenue), is difficult to differentiate due to its commoditized nature. Furthermore, the firm has reported economic losses in each of the past eight years, which we view as further evidence of a lack of competitive advantage. We believe competitive pressure will remain intense, as retailers reduce shelf space allocated to cereal, and as new protein-focused products flood the market to meet consumers’ growing demand, pressuring Post’s active nutrition and refrigerated food offerings.

Post’s largest category, cereal (39% of revenue), is experiencing a secular decline in consumption. To offset this, Post has diversified into higher-growth areas, refrigerated foods and active nutrition. Refrigerated foods (primarily egg products and refrigerated side dishes) have been experiencing more attractive growth rates (3% to 4%) although a large portion of this business is difficult to brand, due to the commoditized nature of agricultural products, and thus maintains lower margins. In the active nutrition segment, Post’s Premier Protein brand has been performing well in the ready-to-drink shake category, although the firm has been struggling in the protein powder and bar segments. Post plans to IPO this segment over the next year, in an attempt to unlock the value of this attractive business. However, at the current valuation, we believe this potential is largely reflected in the shares.