2023-04-24 09:48:19 ET
Summary
- I like Post Holdings' recent move to enter the pet food market by proposing to buy a few pet food brands from The J. M. Smucker Company.
- POST has also come up with new products to benefit from emerging trends like snacking and health consciousness.
- I stick with my Buy rating for Post Holdings, as I take a positive view of the recent developments for POST.
Elevator Pitch
I continue to rate Post Holdings, Inc.'s ( POST ) stock as a Buy.
With my prior update for POST published on December 2, 2022, I identified two potential re-rating catalysts for Post Holdings relating to growth and profitability.
In this latest article, I turn my attention to Post Holdings' acquisition of a couple of pet food brands from The J. M. Smucker Company ( SJM ) and emerging trends in the food industry. I think that POST's proposed deal to buy pet food brands from SJM is good, after an evaluation of the pet food industry's growth prospects and the deal valuation. Separately, POST has introduced new product offerings to capitalize on emerging trends like snacking. My bullish view of Post Holdings remains intact after reviewing recent developments for the company, which explains why I have maintained a Buy rating for POST.
POST Enters Pet Food Market With Recent Acquisition
I highlighted in my earlier December 2, 2022 write-up that "the greater-than-expected inorganic growth potential" taking into account "its improved financial position" is one of the catalysts for POST. This specific catalyst is expected to be realized soon, as Post Holdings' proposed purchase of a few pet food brands from SJM is targeted to be completed in Q2 2023 (calendar year).
The Specific Brands And Assets That POST Is Planning To Buy From SJM
POST's Pet Food Acquisition Presentation
Post Holdings' New Brand Portfolio Mix Following The Acquisition Of Pet Food Brands From SJM
POST's Pet Food Acquisition Presentation
At the investor call discussing this deal, Post Holdings emphasized that it has "long considered pet a natural extension for our buy-and-build strategy", and referred to the planned acquisition as "an opportunity at a reasonable price that provides sufficient scale to matter and upon which we could build." In a nutshell, POST didn't overpay to enter a new fast growing product category, which is positive in my opinion.
Post Holdings' historical revenue CAGR for the FY 2016 (YE September 30) to FY 2021 period (excluding FY 2022 which was affected by pandemic-related supply chain and commodity price headwinds) was a decent +5.0%. In comparison, the pet foods brands which POST is proposing to purchase from SJM are in product categories that are growing much faster what the company has done as a whole in the past. In its pet food acquisition presentation slides, POST cited data from NielsenIQ which indicated that the US mainstream and entry premium pet food markets have expanded at relatively faster CAGRs of +7.0% and +7.9%, respectively for the past four calendar years.
Looking ahead, these pet food brands in the mainstream and entry premium pet food segments (to be acquired from SJM) have the potential to grow even faster in the near term. As the economic environment becomes more challenging, it is realistic to expect that an increasing number of pet owners are likely to trade down from brands in the premium and super premium categories. Post Holdings revealed at the investor call relating to the recent proposed acquisition that "mainstream and entry premium (pet food) have gained traction as consumers have shifted to value" which is a trend expected to "persist for some time" based on its observations.
It is also worthy of note that Post Holdings is paying a reasonably attractive price to add these pet food brands to its portfolio. The $1.2 billion acquisition consideration is equivalent to an EV/EBITDA multiple of approximately 8 times adjusted for yearly cost synergies amounting to around $30 million.
Cost Synergies Relating To The Proposed Purchase Of Pet Food Brands From SJM
POST's Pet Food Acquisition Presentation
In comparison, POST's current consensus forward next twelve months' EV/EBITDA multiple of 10.4 times (source: S&P Capital IQ ) is higher than the deal acquisition multiple of 8 times, implying that this transaction is accretive. Moreover, the actual deal synergies might turn out to be more substantial than what Post Holdings' management has guided for now. POST noted in its pet food acquisition presentation slides that there is "potential upside" to the estimated annual cost synergies of $30 million.
In summary, I have a favorable opinion of Post Holdings' venture into the pet food market with the planned acquisition of multiple pet food brands from The J. M. Smucker Company.
POST Is Capitalizing On Emerging Trends
Recent news flow suggests that POST continues to take advantage of trends emerging in the food industry.
Firstly, Post Holdings previously announced in February 2023 that it had launched a new cereal product called "Sweet Dreams", which it referred to as "the first ready-to-eat cereal designed to be part of a healthy sleep routine." Specifically, POST disclosed that the new "Sweet Dreams" cereal product contains "vitamins and minerals" which "support natural melatonin production."
Most people want the best of both worlds. On one hand, many consumers have the habit of snacking at night. On the other hand, a lot of them have become increasingly health-conscious. In that respect, a product like "Sweet Dreams" positioned as a snack with health benefits will naturally find favor with consumers.
Secondly, Post Holdings' "is expanding its snack cheese stick offerings with new flavors for adult palates" according to a March 15, 2023 media release .
A survey of over 1,000 Americans aged between 18 and 80 by the International Food Information Council found that the proportion of people who snack every day rose from 58% in 2021 to 73% in 2022. Therefore, it makes a lot of sense for POST to extend the reach of certain products beyond kids to other demographic segments.
Thirdly, a recent April 12, 2023 Seeking Alpha News article highlighted that "food away from home prices continued to inflate" as "the food at home index fell." As consumers tighten their purse strings in a tough economy, this will benefit consumer food product companies like POST as an increasing number of people eat more often at home.
Closing Thoughts
Post Holdings' recent new product launches and planned purchase of selected pet food brands from SJM are shrewd moves that will create value for the company in my opinion. Taking into account these recent corporate developments, I leave my Buy rating for Post Holdings unchanged.
For further details see:
Post Holdings: Spotlight On Pet Food Acquisition And Emerging Trends