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Post Holdings Stock: High Price for Low Growth (NYSE:POST)

Muesli, powdered milk, aisle from the baby food category in the supermarket

ThamKC/iStock via Getty Images

Post Holdings Inc (NYSE: POST) took its subsidiary BellRing Brands (BRBR) public in 2019, but the focus of this article is on Post versus its peers, not parent versus subsidiary. The cult brand has one known heritage, but the current version of this company was spun off from Ralcorp in 2012. Its segments are divided into Post-Consumer Brands, Weetabix, Foodservice, Refrigerated Retail and BellRing Brands. The global grain market is estimated grow by 3.7% by 2030. Below is the share price since the IPO:

CAGR of POST stock price

dividend channel

Below are the return on investment metrics:

company

Average 10-year ROE

Average 10-year ROIC

10-year CAGR per share

FCF 10-year CAGR

POST

1.4%

0.6%

6%

12.4%

K

37%

10.4%

6.2%

4.1%

GIS

24.9%

10.3%

6.5%

4.7%

CPB

44.1%

11.8%

3.1%

-1.4%

KAG

11.5%

5.1%

5.1%

0.1%

Source: QuickFS

capital allocation

There is no clear product advantage between the major cereal manufacturers. Gaining and losing market share is not driven by sheer innovation. Capital allocation is extremely important in these mature companies. M&A will always play a major role for the largest companies in this industry. It’s virtually impossible to know what the correct configuration of tokens should be, and the individual tokens are usually traded back and forth between the big players as if they were Pokemon cards.

They stopped paying a dividend in 2020 and have yet to resume it. A new round of buybacks was recently announced, but the stated intention is to hold them as treasury stock rather than cancel the shares. I don’t expect the number of shares to be reduced significantly over the next few years.

dig

This company’s moat is only as strong as its brand power. On the one hand, brand power is real and easy to see. Inflation is absolutely driving people towards the lower cost private label and this trend is only increasing. This doesn’t negate the fact that the most well-known brands are still intact. If not enough people chose branded products, these companies would eventually die out and private label would dominate.

The ability to raise prices is helping gross margins, and grains is a category that’s been hit hard, with prices up 16% Y/Y. I don’t expect past sales growth to pick up when inflation is this high and sustained.

risk

POST has had three consecutive years of negative earnings from 2014 to 2016, but has remained free cash flow positive for the past decade. Free cash flow growth has been strong, but long-term debt has risen by a CAGR of 20.5%, and its share count has also doubled over the past decade.

Returns on capital are well below average and show no sign of a turnaround. Operating margins have been inconsistent across the board, and that’s an important red flag. This, coupled with high levels of debt, will stall growth. These are the biggest risks, even if net income remains positive for the next few years.

valuation

Below is a comparison of multiples:

company

EV/Sales

EV/EBITDA

EV/FCF

p/b

div. yield

POST

1.5

10.2

49.6

1.4

n / A

K

2.1

13.4

23.9

5.8

3.2%

GIS

3

14.8

20.5

4.5

2.8%

CPB

2.2

11.8

18.5

4.3

3%

KAG

2.1

14.2

33.4

1.9

3.8%

Source: QuickFS

From a pricing perspective, POST is mostly in line with its competitors, with the exception of the FCF multiplier. The FCF’s growth is qualitatively the best aspect of the company, but it doesn’t deserve such a high multiplier. Of the $11.5 billion in assets, goodwill alone accounts for $4.4 billion, and that’s something to keep in mind.

Next comes the DCF model with very conservative growth estimates:

dcf model from POST

money chimp

With the current share price at 85.26, POST is significantly overvalued in terms of future earnings growth. Stocks have outperformed the market since going public, but the law of big numbers will hold back future growth and operating margins show no sign of stabilizing.

Conclusion

POST has a long heritage and its brand power has endured for many decades. From here, brand power won’t mean as much as it used to. Despite the acquisition of private label company TreeHouse Foods in 2019, inflation will drive more consumers to private label alternatives. Right now there is very little upside potential, no room for margin expansion and overvaluation in terms of multiples and intrinsic.

Long-term debt is higher than revenue, and its share count has doubled in ten years, showing that growth may have just cost too much. There needs to be more deleveraging and margin stabilization for me to be serious about buying the stock. Despite fairly good free cash flow growth, the overall company quality is too low to be considered a long-term investment regardless of price.

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