Post Holdings Inc (POST), General Mills, Inc. (GIS) – Buy, Sell, or Hold This Cereal Up and Comer: A SWOT Analysis

Post Holdings Inc (NYSE:POST), manufacturer of such beloved brands as Alpha-Bits, Shredded Wheat, Pebbles, and Honey Bunches of Oats, has been branching out into crunchy granola territory with several acquisitions. With major changes ahead a SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis is timely.

Strengths

• Mario Gabelli, head of Gabelli Funds and an investor who made big money on takeover candidates, said of Post CEO Bill Stiritz, “I also like to buy an individual that is a gifted CEO.” presenting his case on CNBC in July that Post is a likely takeover target. Stiritz has 33 years of food industry C-suite experience as CEO of Ralcorp, which spun off Post in February 2012. Before that he was CEO of Ralston Purina. One hates to gush but former food industry analyst John McMillin lauded Stiritz, “He’s probably among the best moneymakers of the past 30 years. He’s right up there with former Nabisco and Gillette Chief Executive Jim Kilts and Colgate‘s Reuben Mark.
• The company has made three significant acquisitions this year. Normally an ambitious move for a newly debuted small-cap company these three expand their portfolio of health-oriented brands. Attune Foods came with two natural cereals: Uncle Sam and Erewhon and probiotic chocolate bars. Hearthside Food Solutions at $158 million was a major coup giving Post a 135,000 square foot manufacturing plant and a 30,000 square foot warehouse for lease, another four natural cereal brands and private label granolas. Premium Nutrition for $180 million in cash provides Post Holdings Inc (NYSE:POST) with a line of protein powders, drinks, and bars and their Joint Juice line of nutritional supplements.
• Attune Foods will now be considered as a second operating segment integrating the two newest purchases and will hold all of Post Holdings Inc (NYSE:POST)’s portfolio of organic, non-GMO, gluten-free health-focused cereals, probiotics, and protein drinks. Collectively, the three purchases are expected to add $215-225 million to net sales: $15 million from Attune Foods, $70 million from Hearthside, and $130-140 million from Premier Nutrition.

• Post Foods, will hold all their legacy brands including: Honeycomb, Post Toasties, Grape Nuts, and Great Grains. These are well known, well loved brands familiar to American and Canadian families. Ex-acquisitions, Post Holdings Inc (NYSE:POST) is the third largest US cereal company with 10.6% market share as reported by Nielsen in the third quarter.
• The company has a lean workforce of 1400 employees.These acquisitions will be run by their current management and labor force with only minimal back-office help as needed. Also, the company switched from the broker-based sales model under Ralcorp to a direct sales force which as it stated in its annual report more closely aligns the company’s interest with its sales team.
• Post currently has $7.45 in cash per share and the company expects $400 million cash on hand once the Premier purchase closes in late September.

Weaknesses

•  Acquisition and restructuring costs hit first half EPS, declining from $0.77 in the year ago period to $0.16. Third quarter EPS of $0.29 also disappointed by three cents. Accretion and synergistic cost savings aren’t far down the road, though, in my opinion.
• The company manufactured the first cereal as we know it in 1890 and its longevity also means some of the legacy brands are old-fashioned and possibly past their sell-by date (not literally). Gabelli also said,”Cereal was around in 1890, so I don’t have to guess about whether the next Netflix will be here.”
• The company does not pay a dividend, unlike General Mills, Inc. (NYSE:GIS) that pays at a yield of 3.10% and Kellogg Company (NYSE:K) at 2.90%. Instead, it has chosen to keep cash available for paying down debt, strategic acquisitions and support in the form of promotion and advertising to stay competitive. The company also chooses to buy back shares as it did last September buying 5% of its stock with $53 million cash on hand.