Opportunities
- Speaking to the last point, the company has been tweaking legacy brands adding Greek yogurt to Honey Bunches of Oats (delicious!) and doubling the protein and fiber content of some cereals.
- By 2014 some Grape-Nuts and Great Grains varieties will be non-GMO. More legacy brands could go non-GMO until Post Holdings Inc (NYSE:POST) is the only major cereal company totally non-GMO. That would be a strong customer incentive to buy Post instead of Big G and special K.
- It’s not all grim grains and fiber. The company announced a Poppin’ Pebbles (explodes in your mouth) debut soon and testing has trended favorably.
Threats
- Kellogg and General Mills are the main threats. Kellogg disappointed on second quarter revenue and reported US Morning Food sales (cereals) down 3.3%. General Mills was downgraded by Jefferies to Underperform for not enough ad spend so the struggle for shelf space will only become more competitive. As President and COO Block said on the third quarter conference call, “This is a category where competition battles over tenths of a share point.” (source Seeking Alpha transcript)”
- Both Kellogg and General Mills are global companies whereas Post Holdings Inc (NYSE:POST) only distributes in the US and Canada with no immediate plans to expand internationally.
- According to a recent Business Week article Americans are eating less cereal at breakfast, if they sit down to breakfast at all. COO Block also noted the ready-to-eat cereal category is challenged, “as measured by Nielsen, that was down, in dollars, 2.6% for the same 3-month time period.”(again Seeking Alpha). Both Kellogg and General Mills have been expanding breakfast options with more cereal and protein bars to address this issue.
- With an extra six cereal brands to support, Post could see more promotional expense ahead. However, that purchase of Premier Nutrition works well as the trend toward supplementing with more protein was noted on the third quarter conference call.
- Kellogg and General Mills are not the only cereal companies out there, Pepsico has been expanding cold and hot cereal and breakfast bar brands in Quaker and B&G Foods has a line of hot cereals.
- Increasing commodity costs, particularly of fruit and grain, are a concern with CFO Robert Vitale adding they were offset in the third quarter by lower cost sugar and nuts. This along with competitive price decreases were responsible for a 170 basis points gross margin contraction to 43.1%.
The Foolish takeaway
Post cereals may be a takeover target as Gabelli says or the newest health food company around. No matter, it has a great CEO, soon to be accretive acquisitions, and is fighting hard for those tenths of share. I think they may just win some, so buy on pullbacks.
The article Buy, Sell, or Hold This Cereal Up and Comer: A SWOT Analysis originally appeared on Fool.com and is written by AnnaLisa Kraft.
AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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