11/16/2015

ValueInvestorsClub/POSTHOLDINGSINC(POST)

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POST HOLDINGS INC POST

October 01, 2015 by smash432 (/member/smash432/52655)
2015 2016
Price:
59.00 EPS
0
0
Shares Out. (in M):
73 P/E
0
0
Market Cap (in M): 4,307 P/FCF
0
0
Net Debt (in M):
3,962 EBIT
0
0
TEV:
8,269 TEV/EBIT
0
0

Description
SituationOverview:SinceitsspinofffromRalcorpin2012,POSThasbeenonanM&Atear,
completingovertenacquisitionsandleveringitsbalancesheetto~6.0xEBITDA.Whilethepace
andstrategicrationaleforsomeoftheseacquisitionshavegiveninvestorspause,theongoing
diversificationofitsbusinesshastransformeditfromapureplaycerealcompanytoahigher
growthpackagedfoodcompanywithamorediversifiedbreakfastportfolioandestimated60%
ofsalesinhighergrowthcategories.Despitetransitoryissuesfromoperationalmisstepsand
headlineriskfromAvianFlu,POSTsstrongFCFgeneration,whichyields6%+,highlightsthe
30%+leveredreturnofthispublicLBO.Pricetargetof$90.

WhySituationPresentsItself:Giventhepaceandbreadthofrecentacquisitions,andthe
resultingopacityintheearningspoweroftheproformabusiness,thereisconcernthatPOSThas
not"boughtright"andthatrecenttransactionsdonotjustifytheirmultiplesandassociated
leverage.POSTchunkedQ314earningsattributabletotheperformanceoftheseacquisitions
(Dymatize,Premier),significantlyreducedFYEguidance(again),andraisedconcernsaboutthe
companysintegrationability.Thestocksoldoffsharplynearly25%inthemonthsafterQ3
earnings.Althoughthestockhasperformedwellsincethenonimprovedquarterlyearnings,
FYQ2earningsweredampenedfromtheAIoverhangstocksoldofffrom$51/shareto
$42/share.Finally,theacquisitionofMOMsbrandswhichatfirstwasreceivedwitha
lukewarmresponseasitdoubleddownonthesecularlychallengedcerealcategorywilllikely
provideforsignificantbottomlinecontributionfromrationalizedtradespendandadditional
upsidetothe$50Msynergyguidance(yettobeappreciated).At10xEBITDA,amaterialdiscount
toalowergrowthcompetitorset,webelievethatvaluationtodayreflectslowexpectationsinthe
turnaroundinbusinessfundamentals(cereal,ActiveNutrition),conservativeassumptionsover
thecostsavingsopportunitiesatMOMs,norgivecredittotherapiddeleveragingpowerof
POSTsbusinessmodel.
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NotableEvents:
oOn1/25/2015,POSTannouncedtheacquisitionofMOMsBrandsfor$1.15bn.
oOn4/28/15,POSTreportedthat~10%ofitsMichaelFoodseggsupplywasaffectedbythe
currenthighpathogenicavianinfluenza(AI)outbreak,withtheexpectedimpactraisedto
~14%ofitssupplyasofitsF2Q15reporton5/7/15,andthenagainto~20%on5/12/15.By
August,POSTannouncedthatthroughitscostcontrolsandforcemajeurepricinginitiatives,
theAIheadwindhadeffectivelybeenmitigated.
oOn8/12/15,POSTraised~$300MinamixedshelfofferingforincrementalM&A
oOn9/2015,POSTclosesDymatizesmanufacturingplantandpermanentlytransferedtoco
packers.POSTalsopurchasedWilliametteEggfarms,whichshouldadd$15MinEBITDAto
FYearnings.
CatalystPath&Timing:
oWebelievethatPOSTsentimenthastroughedandisalreadyontherise,andthepathto
gettingpaidwillbefromthefollowing:
MOMs/POSTintegrationupdates,whichwillmostlikelystartinQ315;wewouldexpect
either1)anaccelerationinthetimingofsynergies/costsavingsrealizedand/or2)
increasedsynergytargets(increasedfrom$50Mguided).
OngoingIRIdataonPOST/MOMcerealtrends,whichsofarhavedemonstratedstrong
momentum.ThelatestscannerdatashowsPOSTgrowingsalesinthelatest12weekby
3.8%vs.K(4.1%)andGIS(4.8%)andgaining1ptsofmarketshare.
ActiveNutritionearningshavetroughed,andweexpectthissegmenttocontributebythe
endoftheyeartoearly2016.Althoughthisislikelya$40$60MEBITDAbusiness(less
than10%ofoverallPOSTprofitability),weexpecttradingmultipleexpansionvs.bottom
linecontributiontobeadriverofshareappreciationfromthisbusiness.
WeareinaholdingpatterninMichaelFoodsasthefalloutfromAIhasbeenongoingand
whoemergesasawinner/loserremainstobeseen.However,themostrecentfinancial
updateshasshownPOSTtobeadeptatmitigatingtheepidemicandbelieveMichael
Foodsisinthebestpositiontogainmarketsharefromcompetitors(Cargill/Rembrandt)
astheycullcustomers.Sofar,AIhasnotnegativelyaffectedPOST'sprofitability.
i)AvianFluwillmostlikelypersistasanoverhangfortheforeseeablefuturewiththe
possibilityofaresurgenceinthefallastheweathercools.
WithcareerChairman/CEOBillStiritzastheChairmanofPOST,potentialgrowththrough
M&Aisalwaysinthecards.POSTcurrentlysitsonabout$1billionindrypowder
(includingaccordionfacility),andgivenStiritzsreputation,wewouldexpectcontinued

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M&Abothboltonandlargeracquisitions(CAGrumorsofbuyingbackRalcorporthe
ConsumerFoodsGroupareubiquitousalthoughthemostrecentnewsisthatPOSThas
notsubmittedabid).

Conditions/Miscellaneous:ConvertiblePreferreds
oHolderscanconvertthe2.4Msharesat2.1192sharesofcommonstockpershareof
convertiblepreferred($47.19conversionprice;5.09sharedilutionimpact)
oHolderscanconvertthe3mn+.2overallotmentsharesat1.8477sharesofcommonstock
($54.12conversionprice;5.54sharedilutionimpact).

Overthepasttwoyears,POSThastransformedfromaonecategorycompany(challenged
RTEcerealcategory)toprovidingadiversifiedproductofferinginhighergrowth
segments.
oPOSThasacquiredover12companiesintheareasofsportsnutrition,eggproducts,
pasta,cheese,refrigeratedpotatoes,andprivatelabelpeanutbutter/granola.
oThechartbelowillustrateswhatthesalesandEBITDAattributionisperacquisitionin
additiontotheimpliedmultiple.Assuming$250MinEBITDAcontributionfromthePOST
cerealbasebusinessonanormalizedbasisandassumingNOorganicgrowth,POSTisa
$800M+EBITDAcompany(yearoveryearbridgeincludedlateron).

oProformafortheseacquisitions,nearly60%ofPOSTsbusinessisinmoderate/high
growthproductofferingsoutsidethecerealcategory(althoughwebelievecerealwill
actuallybeaflatgrowingcategoryintheST).

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UpsidetoMOMsBrandsSynergiesismeaningful.
Background/MarketShare:POST,whichisthethirdlargestU.S.brandedreadytoeat
cerealmanufacturer,regainednearly1.4marketsharepointssinceits2012lowto
nearly20%(includingMOMs)despitethecategorysmultiyearweakness(8%declinein
retailvolumessince2011).Interestingly,POST(notincludingprivatelabel)wastheonly
largecerealcompanytoincreaseretailvolumein2014despitethecategorydeclining
3%.Thecompanyexpectsthecategorytodeclineanadditional4%inFY2015,although
POSThasbeenabletobuckthistrendgiventheacquisitionofMOM.POSThasgained
nearly70basispointsofsharein2014thehighestgainamongthetopbrandedand
privatelabelplayersovertheyearagoperiod,as9ofitstop12corebrandshaveeither
stabilizedshareorgainedmarketshare.
TheacquisitionofMOMsBrands,whichplaysinthevalueendofRTEcereals,provides
forsignificantupsidetothe$50Mofsynergiesmanagementhascurrentlyoutlined.
i)Distribution:MOMdrivesthemajorityofitssales(morethan60%)inmorerural
regionsoftheU.S.(e.g.,Texas,Oklahoma,Washington,Idaho,Montana,Oregon,
Iowa,Nebraska,Florida,Mississipii,Alabama,Georgia,etc)whilePoststoptwo
regionsarethemorepopulatedNortheastandGreatLakesregions(inline
exposurewithGISandK).
ii)ThebestinclassMOMsfacilitiesandPOSTfacilitiesaresignificantlyunder
utilized;IRhasindicatedthatclosingoneofthefacilitiesisdefinitelyonthetable.
Forreference,POSTcloseditsModestoplant(madeGrapeNutsandRaisinBran)
whichwasa$14Mcostsavingsoffthebat.
Toputthisinperspective,seearepresentativelistofmergersinthefoodspaceandthe
announcedcostsavingguidanceasa%ofthetargetedsales.MOMsoutlined$50Mof
costsavingsimplies~6.6%oftargetedsales.Giventhe100%overlapinproduct
category,wewouldassumecostsavingsnear910%ofsalesor$75M.Tablebelowthat
thefloorinpotentialcostsavingsisinthemid6%.

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AvianFluisatransientheadlineissue;MichaelFoodswillmostlikelybethewinnerat
theend.
BriefSituationOverview
On4/28/15,POSTreportedthat~10%ofitsMichaelFoodseggsupplywasaffected
bytheAIoutbreak,withtheexpectedimpactraisedto~14%ofitssupplyasofitsF2Q15
reporton5/7/15,andthenagainto~20%fivedayslateron5/12/15.Asofits5/7/15
update(when~14%ofthesupplywasaffected),POSThadpreliminarilyexpectedthe
impactfromAItorepresenta$20mmEBITDAheadwindoverthebalanceofFY15(5
months),basedonacombinationoftheexpectedimpactfromthelostvolumeassociated
withlimitedsupply,aswellasthehighercostofanysupplyPOSTisabletoprocureon
theopenmarket(asof5/8/15,averageeggcostshadincreased+40%from4/22/15,for
example)
TherewasafalsepositiveforAIon5/27accordingtotheNebraskaDept.of
AgricultureataMFIlayinghenflockofthreemillionheadinBloomfield.Thiscoincided
withanincreasedest.byPostofitseggsupplyimpactedbyAIto35%from25%.On6/3,
NorfolkDailyNewsreportedthatfollowuptestinghasfailedtoconfirmthepositivetest.
***POSThasenactedforcemajeureeffectiveimmediatelyoncustomers;asifthe
latestearnings,POSThasdeclaredthatAIheadwindtoprofitablilityhasbeeneffectively
mitigated.
Whatarethelongtermimplications?AbsentAI,therewillbeclearwinnersandlosersinthe
nexttwoyears.Qualitatively,wefindthatMichaelFoods,whichhashadtheleastexposureto
AIandamorediversifiedcustomerbase,willbeaclearwinnerwhileitscompetitorsare
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eitherunderfinancialduressorhavekeycustomerconcentration.Furthermore,wewould
expectMFItoactuallyimplementinsurancesurchargestotheirgrainspluscontracts,which
willserveasamechanismforfurtherpricinggains.
-TherearecurrentlythreeplayersintheeggprocessingspaceMichaelFoods,Cargill
(hasexclusivityonMcDonalds),andRembrandt(privatelabel).
Anecdotallywearehearingthefollowingfromourchannelchecks:
i)Cargilliscullinghighprofitbusinessinordertoserveitslargestcustomer,
McDonalds.Currently,approximately45%ofCargillssupplyhasbeeninfectedwith
AI.MCDisalsonowrollingoutanalldaybreakfastmenu,furtheringcontraining
Cargilltofocusonitslargestcustomers.WebelievePOSTwillbethebeneficiaryof
furthercustomerattritionandpotentiallywinningsomeofMCDsbusiness.
ii)Rembrandtisfinanciallyconstrainedandispotentiallyonalifeline.Outof700
employees,theyhavealreadylaidoff270employeesduetoAIoutbreaks.According
topublicsources,Rembrandthasabout14.5Mhens,ofwhich50%havebeen
exposedanddestroyed.
(1)5/1:Rembrandt,Iowa,announcedthatitwilllayoff231.Onebarnhousing
about250,000henswasinfected,but5.5millionbirdswerekilledasaresult.
(2)5/21:Renville,Minn.,announceditwillhavetolayoff39workersinaddition
tokilling2millionchickensaftersufferingMinnesotassinglelargest
contamination.
oAdditionally,thecurrentbackdropinthecommoditycomplex(cornandsoy),whichare
atmultiyearlows,willprovidesometailwindtoMFIseggEBITasfeedcostsfallon
delayedpassthrough.Chartforillustrativepurposesonly.

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ThecomplexionofPOSTsearningsinrecentquartershasbeenobfuscatedbythemyriad
ofacquisitionsinadditiontointegrationmisexecution.Normalizingforwhatwe
believeareonlymomentaryissues,webelievePOSThastheabilitytogenerateover
$800M+in2016andcloseto$900MinEBITDAby2017
POSTraisedtheirFYguidancefrom$585M$615Mto$635M$650MoninAugust,even
admisttheAIheadwind.
Thebelow2016EEBITDAbridgeattemptstoreconcilethenoiseoftheaforementioned
integrationissues.
Note:thatassumingnoorganicgrowth,2016EEBITDAwouldbe$800M+purelyonFY
contributionfromtheMOMsacquisitionandfromrealizedcostsavingsfromtheMOMs
acquisitionvs.afullybaked$780Mconsensus2016EBITDAnumber.Includingorganic
toplinegrowthof3%orsowouldcontribute~$25MinincrementalEBITDAor
~$830Min2016EEBITDA.

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AttheheartofPOSTsbusinessmodelisapublicLBOlevered~6.0x+withsignificantFCF
generationthatwillbetheultimatetransferofwealthfromdebttoequityholders.Thetable
belowillustratesthisdeleveragingscenario.
oHistorically,POSThastradedbetween8.5xEBITDAand11.5xEBITDA.Thiswasduringa
timeinwhichthecompanywaseitherasecularlychallengedonecategoryfoodcompanyorin
themidstofintegratingmultipleacquisitions.Althoughthecompanyiscurrentlytrading~10.2x
EBITDAoffPF2016EEBITDA,wewouldexpectthebusinesstoholdthismultiple(inlinewith
maturebusinessesGIS,CPB,CAG)asthecompaniesintegrationstrategybearsfruitintheformof
FCFgeneration/deleveraging.
oReviewingthecomps,notethatthespacetradesfairlytightlyinthe10x15xEBITDArange.
ThenameswecompPOSTtoareGIS,CPB,andCAG(whichtradetightlyinthe12x13x
range).
Incomparison,POSThasavastlysuperiortoplinegrowthalgorithmdrivenbyabove
averagegrowthinMichaelFoodsandActiveNutrition,whichisoffsetbythemore
challengedcerealbusiness,althoughweseevastlysuperiorbottomlinecontributionfrom
thisbusiness.
i)Fromcompstable,CPB,CAG,andGIShaveeithercontractedtoplinegrowthin
forecasted1415andwhichisflatin1516.Bycomparison,weforecastPOSTto
growintheMSDtoHSDforthenexttwoyears,builtonaconstructiveindustry
backdropforMichaelFoodsandturnaroundinActiveNutrition(albeit,still
conservativelymodeled).Notethatwedonotmodelaturnaroundinthecereal/MOMs
segmentbutconservativelygivecreditforbottomlinecontributionfromcostsavings.
AlthoughcomparingthemarginstructuresofPOSTvs.thecompsetislessfavorableand
somewhatdifficult,wenotethatthegrowthrateinEBITDAfrom2014to2017forthe
vastmajorityofthespaceisintheLSD.Inparticular,CPB,CAG,andGISareforecastedto
growthfrom201417at1%to3%CAGR.LayingoverthesynergiesfromtheMOMs
acquisitionaloneyieldsclosetoaDDgrowth.POSTsEBITDAmarginsof13%14%is
inlinewithCAGvs.CPBandGISwhichareinthe18%19%range.
WebelieveinvestorsareoverpenalizingPOSTforexecutionandaleveredbalancesheet.
However,astheanalysisshowsperbelow,POSTsuperiorFCFgenerationwilldelever
rapidlytoamanageable~4.04.5xEBITDArange,whichissimilartoCAGsleverage,and
shouldyieldareratetoamoreappropriate12xEBITDAmultiple.

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I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst
oOngoingM&A:mgmtisfocusedonacquiringboltonplatformsanddivestingnonstrategic
businesses(wouldnotbesurprisedtoseecheeseportfolio,adragtoMichaelFoodsprofitability,
beingdivested).
oWeeklyRTECerealNielsenData,whichshouldshowcontinuedpricing/marketshare
improvementfromthecombinedMOMs/POSTportfolio.
oMOMstargetedcostsavingsQ415:MgmtannouncingcostsavingsupdatefromMOMs
acquisition;FY2016shouldhighlightupsideto$50Mcostsavingstarget.

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oAIFall2015:headlineshaveplayedoutwouldexpecttoseesomematerialimprovement
onmarginsidefromforcemajeurandPOSTgainingnewcustomersfromcompetitorfallout.

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