Adam Weiss and James Crichton’s Scout Capital Management has reported a position of 2.3 million shares in Post Holdings Inc (NYSE:POST), the $1.4 billion market cap packaged food company best known for its cereal brands including Honey Bunches of Oats. This comes out to 6.9% of the total shares outstanding. According to our database of 13F filings which we use to help us develop investing strategies (the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year, and we think that more strategies are possible as well), the fund had not owned any shares at the beginning of this year and so this seems to be a new position for Scout. See Scout’s stock picks from the end of December.
The first quarter of Post Holdings Inc (NYSE:POST)’s fiscal year ended in December 2012, with the company growing its sales by 8% compared to the same period in the previous fiscal year. However, expenses were higher as well with the result being that operating income was actually down slightly; higher interest expenses contributed to earnings per share coming in at 23 cents as opposed to 37 cents in the first quarter of the last year. The decline in cash flow from operations was shallower, and Post had some cash left over after its investing activities.
A number of food companies are currently trading at fairly high multiples. Some investors consider them something of a safe haven in the current market while Berkshire Hathaway’s recent purchase of Heinz has left many analysts listing more food stocks that Buffett- or other acquirers- could buy (Post is small enough that it could conceivably be acquired, though we wouldn’t rely on that as an investing thesis). Currently the stock carries trailing and forward P/Es of 33 and 26, respectively, even though we’ve seen that earnings performance has not been particularly strong. The EV/EBITDA multiple is also high at nearly 11x. Billionaire John Paulson’s Paulson & Co. disclosed ownership of 1.2 million shares of Post Holdings Inc (NYSE:POST) at the end of the fourth quarter of 2012, unchanged from three months earlier (find Paulson’s favorite stocks).
The two closest peers for Post Holdings Inc (NYSE:POST) are the much larger (in terms of market cap) General Mills, Inc. (NYSE:GIS) and Kellogg Company (NYSE:K). These stocks trade at a discount to Post- their larger size makes them less likely acquisitions, we suppose- though they still look expensive to us. General Mills, Inc. (NYSE:GIS) trades at 19 times trailing earnings, with limited earnings growth last quarter versus a year earlier, though it is quite the defensive pick with a dividend yield of 3% and a beta of 0.03. Kellogg Company (NYSE:K) is expected to improve its numbers, and so its forward P/E is only 16. While the company has been doing somewhat well- revenue rose 18% in its last quarterly report compared to the fourth quarter of 2011- we aren’t sure how a company in this industry could continue to grow that quickly.
We can also compare Post Holdings Inc (NYSE:POST) to diversified food companies Kraft Foods Group Inc (NASDAQ:KRFT) and ConAgra Foods, Inc. (NYSE:CAG). The dividend yield looks quite high at Kraft Foods Group Inc (NASDAQ:KRFT), at 4% going by recent payments, and that company is also somewhat defensive with a beta of 0.4. In terms of value, however, we are more skeptical as the trailing earnings multiple is 19 (matching GM); it’s probably best to wait for another quarter or two of results unless the dividend is just too rich for an investor to pass up. ConAgra Foods, Inc. (NYSE:CAG)’s net income fell 57% last quarter versus a year earlier, despite a rise in revenue. Wall Street analysts do expect the company to recover, with a forward earnings multiple of 15, but again we would recommend avoiding it until ConAgra Foods, Inc. (NYSE:CAG) has shown stronger performance and looks likely to hit its targets.
None of these food companies looks cheap enough to be that appealing to us, when we consider that their earnings are unlikely to rise by enough over the next couple years to justify the current price. In particular we do think that multiples have partly been driven up by acquisition hopes, and buying into a situation like that doesn’t seem wise. Following Scout into Post Holdings Inc (NYSE:POST) therefore isn’t a good idea in our view.
Disclosure: I own no shares of any stocks mentioned in this article.
