The purest play on cereal…
One of the purest plays on the cereal market is Post Holdings Inc (NYSE:POST), who focuses almost exclusively on ready-to-eat cereals. If you have ever eaten Fruity Pebbles or Honeycomb cereal then you have consumed at least one of the company’s products. According to Nielsen, Post Holdings Inc (NYSE:POST)‘s market share was 10.5% for the thirteen weeks ended March 30, 2013.
Post Holdings Inc (NYSE:POST) is also looking to expand and diversify outside of strictly cereal as well, after recently acquiring the branded and private label cereal, granola and snacks business of Hearthside Food Solutions. While Post is just now starting to venture outside of ready-to-eat cereals, General Mills, Inc. (NYSE:GIS) and Kellogg have both already established business in breakfast products other than traditional cereals. The acquisition is supposed to be completed by the end of this month, and should help the company diversify its business and increase market share. The company will also be looking forward to the added revenue, and hopefully higher earnings, after recently reporting a decrease in both gross profit and gross margins.
Post Holdings Inc (NYSE:POST) has seen not only an uptick in revenues recently, but also in earnings. The problem here is that the stock’s price in relation to these increasing earnings looks too expensive both now and going forward, especially without the benefit of a dividend payment for investors:
| P/E | Forward P/E | Dividend (Yield) | Beta | |
|---|---|---|---|---|
| POST | 40.54 | 27.84 | N/A (N/A) | 0.944 |
The bottom line
The consumption of cereal is fairly limited to North America and a few outlying countries such as Australia. Overseas expansion could provide great growth for companies that sell ready-to-eat cereal and other products such as hot cereal. Another source of growth domestically may come from breakfast items targeting adults. Cereal bars and breakfast shakes are being implemented by both Kellogg Company (NYSE:K) and General Mills, Inc. (NYSE:GIS) to target this market. Breakfast is usually eaten at home, so food producers have a lucrative market that they can continue to expand and develop with the right products.
The global breakfast cereal business was worth around $28 billion in 2010, with the ready-to-eat cereal category accounting for over 87% of this segment at $24.5 billion. This overall market is expected to expand to over $34 billion by 2015. General Mills, Inc. (NYSE:GIS), Kellogg Company (NYSE:K), and Post Holdings Inc (NYSE:POST) are the dominant players in the largest segment of the breakfast market, and are looking to develop breakfast products that also cater more to an adult audience.
While Post Holdings Inc (NYSE:POST) is looking way too expensive for my liking, General Mills and Kellogg Company (NYSE:K) both look reasonable in relation to earnings going forward. General Mills, Inc. (NYSE:GIS), however, has the better dividend and lower beta. Low volatility can be seen as a major plus for a consumer staple stock that is usually seen as defensive and “safe” in nature. Global expansion should also provide growth. General Mills, Inc. (NYSE:GIS) looks like the best company to capitalize from this trend, and its low beta and high dividend yield reward investors nicely.
Joseph Harry has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article Invest in Breakfast for Healthy Returns originally appeared on Fool.com.
Joseph is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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