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Morningstar | Post Begins 2019 by Re-Segmenting Units but Competes in Undifferentiated Categories; Outlook Intact

Despite diversifying acquisitions, Post is exposed to a declining cereal category defined by larger competitors, and it lacks sufficient noncereal differentiated products that can deliver a sustainable competitive edge. Cereal has faded from the breakfast menu as the culinary zeitgeist shifts in favor of convenient, health-oriented foods. Even after its 2015 acquisition of MOM Brands, Post remains a distant third behind Kellogg and General Mills, which can leverage their in-aisle scale to keep retailer relationships strong. Roughly 40% of the company's pro forma sales come from cereal, leaving Post highly exposed.Post is a prolific acquirer, diversifying its offerings away from a nearly pure-play U.S. cereal orientation at its 2012 IPO. However, successes have been offset by costly rebuilding projects (such as Dymatize) and additions without significant synergies (such as Michael Foods). Furthermore, while Post has achieved diversification, its Michael and MOM Brands purchases have done little to add brand intangible assets. However, we are encouraged by the firm’s more recent moves, adding leading brands through its Weetabix and Bob Evans deals while selling a 40% stake (and controlling voting interest) in its private brand unit, and plans to sell 20% of its active nutrition business (through an IPO).The refrigerated food unit (about 45% of pro forma sales) includes Michael, a leading producer of egg, refrigerated potato, and cheese products that we do not believe is sufficiently differentiated to ward off competitive threats. However, Bob Evans should improve the segment's standing in retail by adding a leading refrigerated side-dish portfolio, complementing Michael’s stronger food-service presence.Dynamics are difficult in active nutrition (about 15% of pro forma sales), where demand for convenient, protein-rich snacks has led to a proliferation of protein bar alternatives. While we think powder and shake offerings are more protected, items as diverse as premium jerky and nut blends have given snacking consumers many new health-oriented, high-protein options. The protein tailwind should benefit the segment, but competition should restrain margins and growth.