We came across a bull case theory on Treehouse Foods Inc. (THS) on ValueInvestorsClub by Siren81. We find articles on VIC thoroughly researched by aspiring analysts, who tend to think out of the box. Click here for the full article. Here is the summary.
Illinois-based Treehouse Foods is America’s largest multinational food processing company specializing in producing private label packaged foods. The company’s clientele include all the major supermarkets in the US, and most of the largest restaurant chains. Its largest customer is Walmart with 24% of total sales.
The company enjoys an average of over 50% market share in the segments where it’s a dominant player. The company has an edge in logistics and operations due to its size and experience. Procurement of larger quantities of raw materials and operation of larger facilities is more feasible for THS. With 36 manufacturing plants across the U.S., the company is able to produce products at closer locations to customers, and transport more frequently with optimum transport capacity than its competitors. This enables its customers to manage their inventories more efficiently, and cost-effectively.
As a consumer-staple company, Treehouse Foods’ business is defensive in nature. Interestingly, private label products see higher demand than branded ones during economic slowdown as the former has the advantage of low pricing. Additionally, millennials are open to private labels, creating a demographic attribution for THS.
THS stock, however, is underperforming the industry peers. Primary factors are:
– COVID has underpinned company’s operations in the previous quarters as retailers have opted for the branded names at the cost of private labels. This has rendered THS cost-ineffective for temporary period. Besides, affluent consumers tend to opt for branded products during medical crises and uncertainties.
– Branded products can and do employ ad-hoc ad campaign pushing their sales higher at the cost of THS, which creates some degree of volatility in its quarterly numbers.
– The mammoth $2.8 billion acquisition of Ralcorp in 2016 from ConAgra created operational issues due to inefficient integration, leading to subpar customer satisfaction and drop in margins.
– With stock trading at half of its value couple of years ago, there is a trust gulf between THS and investors. Management needs to bridge this gulf to revive investors’ interest.
THS has almost completed the deleverage, and should soon be cash-rich for share buyback opportunities. The company’s restructuring is complete with purging of non-profitable products, and sale of some divisions. Launch of new products should pave the way for organic growth. Improved operations should yield higher margins. Management is serious about meeting investors’ expectations by walking the (guidance) talk. All it needs is a small organic growth with minimal operating leverage. With potential higher cash flow, THS trading at <8x is attractive at current price.
