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Morningstar | Secular and Competitive Pressures Persist for No-Moat Post Holdings.

Post has a unique portfolio of businesses. As the cereal category has been in secular decline, the firm diversified its revenue base by entering the protein-based categories that were driving the legacy business’ deterioration, such as eggs and protein-based nutritional products. While these actions have stabilized the top line, we believe a competitive edge remains elusive. The cereal business (39% of revenue) has been declining as consumers have shifted away from processed, high-sugar, high-carbohydrate fare. Adding to the challenge, no-moat Post, the third largest player, has had to compete for ever-decreasing shelf-space with market leaders General Mills and Kellogg, both wide-moat firms. That said, Post’s cereal business reports attractive margins, and we applaud the firm’s efforts to further maximize profitability by right-sizing the business for the more modest opportunity. We expect these efforts to drive 300 to 400 basis points of operating margin improvement over the next decade, resulting in 20% margins for the domestic business and 24% for the international division.The refrigerated foods segment (46%) consists primarily of egg and potato products. While this business has more attractive growth prospects (3% to 4%), agricultural commodities are difficult to differentiate and therefore generally do not command a price premium. As a result, this business is relatively low margin (10%) and does not offer the firm a competitive advantage, in our opinion.The active nutrition segment (15%) has the best of both worlds, realizing attractive growth (4% to 5%) and relatively attractive margins as well (15%). Post’s Premier Protein brand is doing well in the ready-to-drink segment, while the firm has realized revenue declines in protein powder and bars. We believe the trend toward clean labels and plant-based proteins, as well as numerous new market entrants, will put increasing pressure on this business going forward. The Premier Protein brand exhibits signs of strong brand equity, and we are optimistic about the company’s plans to IPO this segment. However, we don’t think this segment is significant enough to warrant a moat for Post’s consolidated business.