EUR 850.00 For Business Accounts Only

Morningstar | Private Brands Monetization Should Help Post Focus on Branded Lineup; Outlook Unchanged

Strong third-quarter results, a deal to sell a stake in its private brands unit, and the time value of money should lead to a mid-single-digit percentage uptick for our $85 per share valuation for no-moat Post. Still, our long-term thesis (low-single-digit organic growth and high-teens adjusted EBITDA margin) is intact. Even after considering the planned uptick, however, we counsel investors to await a more attractive entry point.

Year to date, Post saw 23% sales growth (versus our 19% full-year mark) against a 20% adjusted EBITDA margin (in line with our fiscal 2018 expectation). Management expects $1.225 billion-$1.235 billion in adjusted EBITDA for fiscal 2018, narrowed from its earlier $1.22 billion-$1.25 billion range and consistent with our $1.231 billion target.

While we remain skeptical of Post’s long-term competitive advantages even after considering the transaction, we have a favorable view of the firm's plans to sell a stake in its private brands business (roughly 9% of forecast fiscal 2018 adjusted EBITDA) to Thomas H. Lee Partners. Post will receive $875 million in proceeds ($250 million cash, $625 million in assumed debt) from the deal while retaining a 60.5% stake in the common equity of the new entity, 8th Avenue Food & Provisions. Although the deal by itself should not have a material impact on our valuation, we are encouraged that the transaction will allow management to refocus resources on its differentiated, branded products. Leadership indicates it plans to use proceeds to reduce debt; however, we expect such a deleveraging will be fleeting as Post has a long history of acquisitions. We have not been enamored with some of the deals the firm has pursued (leading to our poor stewardship rating), but have had a more favorable view of recent transactions such as Weetabix (which offers expansion opportunities for legacy products in Europe) and Bob Evans (which added a strong, branded refrigerated side dish lineup).

Post’s two largest segments, refrigerated food and Post consumer brands (36% and 33% of fiscal 2017 revenue, respectively) posted results in line with our expectations.

Refrigerated food sales grew 24% year-to-date against a 19% adjusted EBITDA margin, within sight of our 25% and 20% respective full-year expectations. While the segment includes undifferentiated lineups that do not benefit from branding benefits, in our view (such as eggs and potato products), the results reflect favorably on Bob Evans' ongoing strength in refrigerated side dishes. However, we do not believe the side dish unit is sufficiently large as to confer an economic moat on Post as a whole.

Year-to-date, the consumer brands segment's sales grew 6% alongside a 25% adjusted EBITDA margin 25% (not far from our full-year estimates of 5% and 26%, respectively). We expect profitability to improve slightly as the quarter saw Post incur meaningful unusual costs ($14 million) that we expect to ebb, including expenditures associated with an unplanned plant shutdown, a timing-related issue as it insourced manufacturing for co-manufactured peanut butter-based products, and new product introductions.