A Member of Pat McKeough’s Inner Circle recently asked for his advice on Post Holdings, a company that makes many popular cereal brands and other packaged foods.
Pat likes the company’s pivot into pet foods and the fact that earnings are once more moving in the right direction. Despite concerns that new weight-loss drugs like Ozempic will hurt sales, Pat feels this firm’s strong brands should drive the stock even higher over the next few years.
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POST HOLDINGS INC. (New York symbol POST; www.postholdings.com) is a leading maker of cereals and packaged foods. The U.S. supplies 87% of its sales.
Post has four operating segments: Post Consumer Brands (36% of sales), Foodservice (38%), Weetabix (8%), and Refrigerated Retail (18%). It also holds a 50% equity interest in Alpen Food Company South Africa Limited, a maker of RTE (ready-to-eat) cereal and muesli.
In October 2019, Post sold shares of its BellRing Brands business to the public through an IPO. BellRing makes protein bars, shakes and nutritional supplements. Then, on March 10, 2022, Post distributed its remaining 80.1% stake in BellRing to its shareholders.
The company is now expanding into pet foods. In April 2023, it purchased several pet food brands from J.M. Smucker Co. (New York symbol SJM), including Rachel Ray, Nutrish, Nature’s Recipe, 9Lives, Kibbles ‘n Bits, and Gravy Train. Post paid $1.21 billion in cash and shares for those operations.
In December 2023, Post acquired Perfection Pet Foods for $235.0 million. That firm mainly makes private-label pet food and treats.
The Smuckers’ brands generated $1.4 billion in sales for the year ended April 30, 2022. In addition to acquiring the brands, Post also bought three manufacturing facilities and one distribution facility. They are located in Pennsylvania and Kansas.
Inner Circle: Promising earnings for fiscal 2024 signal changing momentum for Post Holdings
Post’s revenue rose steadily from 2019 to 2021 (fiscal years end September 30), climbing 9.6% from $5.68 billion to $6.23 billion. Revenue then fell 6.0% in 2022, to $5.85 billion. That drop was due to the spinoff (to its shareholders) of the company’s remaining stake in BellRing Brands.
Earnings fell 48.7% between 2019 to 2020, from $370.7 million, or $4.98 a share, to $190.1 million, or $2.71 a share. The company continued with its restructuring plan, and the pandemic hurt sales in higher-profit-margin away-from-home channels. Earnings then fell a further 12.3% in 2021, to $166.7 million, or $2.38 a share. The pandemic continued to hurt sales in higher-profit-margin away-from-home channels. As well, much higher costs for ingredients, packaging, fuel and transportation services impacted profits.
In 2022, earnings fell a further 37.9%, to $103.6 million, or $1.68 a share. That drop was partly due to the spinoff of the company’s remaining stake in BellRing Brands. As well, Post incurred added costs as it integrated acquisitions.
Meanwhile, in its fiscal 2023 fourth quarter, ended September 30, 2023, Post’s sales rose 23.2%, to $1.95 billion from $1.58 billion a year earlier. That’s mainly due to $404.5 million from the Smucker purchase. Excluding one-time items, earnings jumped 105.0%, to $110.9 million from $54.1 million; due to more shares outstanding, per-share earnings gained 91.8%, to $1.63 from $0.85.
The brands acquired by Post from J.M. Smucker should be a good fit. The purchase gives Post a strong entry point into the growing pet food category.
Like many manufacturers, Post faces higher input and freight costs. However, it has been able to offset these cost increases by raising its prices.
In fiscal 2024, Post will probably earn $5.53 a share, and the stock trades at 18.8 times that forecast.
Recommendation in Pat’s Inner Circle: Post Holdings Inc. is a buy.
