EUR 850.00 For Business Accounts Only

Morningstar | Post’s 2Q Largely as Expected; Deal Fails to Enhance Competitive Edge; Shares Rich

We don’t plan making material changes to our $92 fair value estimate for no-moat Post after mixed second-quarter results. Pro forma sales were even with a year ago, but the adjusted EBITDA margin expanded 170 basis points to 21.5%. Even after accounting for the mid-single-digit decline in shares, we suggest investors await a more attractive opportunity before building a position. For those interested in the package food aisle, we highlight wide-moat Kellogg as a more compelling opportunity, trading at over a 30% discount to our valuation.

Continued growth in active nutrition (with sales up 5.5%, 15% of revenue), offset erosion in its U.S. cereal arm (down 0.7%, 30% of sales). Even with the benefit from capacity additions in quarter to meet expanding protein shake demand, we anticipate competitive pressures will remain elevated as firms wrestle to grab a slice of this faster-growing category. As such, we don’t expect to alter our 4% full-year forecast for the segment. Conversely, the firm’s cereal mix languished, a challenging predicament as it seems retailers are reducing cereal shelf space and inventories, with management citing a 2.7% gap between sell-in and sell-through. We expect this pressure to continue long term, as the category is in secular decline in line with our negative 0.5% 10-year outlook.

Despite these challenges, Post opted to beef up its position in the category, with the acquisition of Treehouse Food’s private label ready-to-eat cereal mix. While we suspect synergies could be in the cards, we question the strategic merits of the deal. The business will compete head to head with Post’s MOM Brands lineup of value-branded cereals and seems to run in contrast to last year’s spin of its own private-label fare (due to the low margins the business boasts). As such, we don’t believe this deal stands to enhance the firm’s standing with leading retailers, and we posit the categories faltering relevance fails to suggest much in the way of pricing power.

Management shifted the expected timing of the active nutrition segment’s IPO from the second half of fiscal 2019 to the first quarter of fiscal 2020. When high-growth businesses are spun out from lower-growth firms, the transaction typically serves to unlock value; however, we believe that at the stock’s current valuation, this potential is already largely reflected in the shares. Further, while protein-based products are a growing category, and Post has a strong brand in ready-to-drink shakes, this category also represents a small portion of overall food and beverage sales, even for the club channel where these products are primarily sold. In this light, we don’t believe this business has entrenched its relationship with its retail partners.