Calculated Acquisitions And Market Innovation Fuel Growth In Cereal And Pet Segments

Key Takeaways

• Management's aggressive strategy on acquisitions and share purchases highlights confidence in boosting earnings through realized synergies and intrinsic value.
  
• Strong performance in cereal and pet products, along with strategic adjustments in refrigerated retail and value-added eggs segments, shows potential for continued revenue growth and margin enhancement.
  
• Shifts in consumer behavior and challenges in the refrigerated segment, along with increased trade costs, may significantly pressure future revenue and earnings.

Catalysts

Operates as a consumer packaged goods holding company in the United States and internationally.

• Recent acquisitions and aggressive share purchases signal management’s confidence in intrinsic value, potentially boosting earnings as these acquisitions are integrated and synergies are realized.
  
• Strong performance in branded and private label cereal products, along with outperformance in the pet business, suggests potential for sustained revenue growth and market share gains in these segments.
  
• Significant mix improvement in value-added eggs points to margin enhancement opportunities in the Foodservice segment, positively impacting net margins through higher-margin product sales.
  
• The company is addressing underperformance in its refrigerated retail segment by recalibrating trade spending, which could lead to improved profitability and segment performance in future quarters.
  
• Historically low leverage and a forward-looking capital allocation stance towards M&A activity and share repurchases indicate a strategic approach to driving shareholder value, with potential positive impacts on earnings per share through accretive acquisitions and reduced share count.

Assumptions

• Analysts are assuming Post Holdings's revenue will grow by 1.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.5% today to 6.0% in 3 years time.
• Analysts expect earnings to reach $482.5 million (and earnings per share of $7.69) by about September 2027, up from $350.8 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.5x on those 2027 earnings, down from 19.3x today. This future PE is lower than the current PE for the US Food industry at 19.3x.
• Analysts expect the number of shares outstanding to decline by 4.56% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.09%, as per the Simply Wall St company report.

Risks

• Inflation and shifting labor markets may cause fluctuations in consumer spending affecting future revenue.
  
• Rapid pricing changes over recent years have altered consumer behavior, potentially impacting the volume of sales and net margins.
  
• Refrigerated retail segment underperformance due to trade investment cannibalizing base volume without adequate incremental lift could continue to affect earnings negatively.
  
• Delays in achieving full Ready-to-Drink (RTD) shake manufacturing may impact projected revenue and increase operational costs.
  
• Increased trade costs associated with promotional activities leading to lower net pricing and significantly higher sale costs could pressure net margins and earnings.

Valuation

• The analysts have a consensus price target of $125.1 for Post Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $140.0, and the most bearish reporting a price target of just $105.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $8.1 billion, earnings will come to $482.5 million, and it would be trading on a PE ratio of 15.5x, assuming you use a discount rate of 6.1%.
• Given the current share price of $116.1, the analyst's price target of $125.1 is 7.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.