Creative Crop/DigitalVision via Getty Images
Elevator Pitch
I still have a Buy rating awarded to Post Holdings, Inc. (NYSE:POST) stock.
Recent developments relating to POST’s deleveraging, shareholder capital return, M&As, and financial outlook are positive in my opinion. The company continues to lower its financial leverage and return excess capital to shareholders via repurchases. Separately, I like Post Holdings’ entry into the private label food pet segment with its recent M&A deal, which has also boosted the company’s financial prospects as evidenced by its updated guidance. I see no reason to change my bullish view on Post Holdings, so POST remains a Buy-rated stock based on my analysis.
Update On Capital Allocation
With my prior write-up published on August 22, 2023, I highlighted that POST has been able to maintain a “balance between reducing financial risks (deleveraging), stock price support (share repurchases), capitalizing on new growth opportunities (M&A).” Post Holdings’ most recent updates suggest that POST continues to allocate capital in a way that enhances shareholder value.
Post Holdings shared at its Q4 FY 2023 (YE September 30, 2023) results briefing that the company bought back $150 million of convertible senior notes at 87% of par value. This helped POST to reduce its net interest expense by -12% from $317.8 million in FY 2022 to $279.1 million for FY 2023 as revealed in its Q4 FY 2023 earnings release. As per S&P Capital IQ data, the company’s net leverage ratio also decreased from 5.34 times as of June 30, 2023 to 4.77 times at the end of September last year.
With regards to share repurchases, POST allocated $160.2 million of capital to buy back 1.9 million of the company’s own shares between July 1, 2023 and November 16, 2023. This is equivalent to an average share buyback price of $84.3, or an implied consensus forward FY 2024 normalized P/E of 17 times. Taking into account Post Holdings’ historical three-year and five-year mean forward P/E multiples of 25.6 times and 23.9 times (source: S&P Capital IQ), POST has repurchased its shares at a reasonably attractive valuation in recent months.
I will touch on Post Holdings’ capital allocation pertaining to inorganic growth in the subsequent section.
New Pet Food Business Acquisition
POST announced its proposed purchase of Perfection Pet Foods in October 2023, a deal that was completed in December of the prior year.
In its initial announcement revealing this M&A transaction, Post Holdings noted that the addition of Perfection Pet Foods into its business portfolio will offer the company “additional manufacturing capacity to insource a portion of its current pet food business” and venture into “the private label and co-manufacturing pet food category.”
An August 29, 2023 article published in the Pet Food Industry magazine cited NielsenIQ data which indicated that the Equivalent Unit “growth in the pet retail channel for (the US) private label pet foods and treats” was superior to that for the “branded categories” in the “52 weeks ending July 1, 2023” time frame. In this same article, it is also mentioned that the penetration rate of private-label pet care products in the US is still pretty low in the mid-teens percentage range.
In other words, the private-label pet food market segment is exhibiting signs of positive momentum, but there is still room for further growth considering the current penetration level. As such, POST has made a shrewd move in acquiring Perfection Pet Foods.
It is also noteworthy that POST will be discerning when it comes to assessing potential acquisition targets. At the company’s Q4 2023 earnings call, Post Holdings stressed that “there is a high bar to clear”, even as it “continues to actively evaluate M&A opportunities.”
The Perfection Pet Foods deal has a favorable impact on Post Holdings’ FY 2024 (October 1, 2023, to September 30, 2024) outlook, which is detailed in the next section.
Updated Guidance Was Unaffected By Avian Influenza
In the early part of last month, Post Holdings issued a press release revealing that it has revised the mid-point of its FY 2024 EBITDA guidance upwards from $1,230 million to $1,250 million to factor in the operating earnings contribution from the Perfection Pet Foods M&A transaction.
More significantly, POST emphasized in the December 7, 2023 media release that “no change was made to the outlook range” to account for the effects of “avian influenza” as the “management believes the related financial impact is within the tolerances of the range.”
As of early December last year, avian influenza had impacted approximately 10% of Post Holdings’ egg supply. POST had indicated that the company will provide further updates if another 5% of the company’s supply of eggs is affected by avian influenza. In that respect, no news is good news, as POST hasn’t issued any new disclosures relating to its egg farms and the negative impact of avian influenza at the time of writing.
The current FY 2024 median analysts’ EBITDA estimate for Post Holdings is $1,249 million (source: S&P Capital IQ), which is very close to the company’s mid-point guidance of $1,250 million. This serves as another indication that the current avian influenza outbreak isn’t expected to affect POST’s business operations and financial performance in a substantial manner.
Closing Thoughts
I view Post Holdings’ latest corporate developments in a favorable light. Continued buybacks and debt retirement will improve POST’s financial profile, while Post Holdings’ recent acquisition puts it in a position to benefit from the growth of private-label pet food. This provides an explanation for my decision to retain a Buy rating for POST.
