POST - Post Holdings

[loganc]

Going to stir the pot here.  The following is a short thesis posted in the public comments on VIC:

 

Thanks for the write-up. We think POST is a compelling short, and the Michael Foods acquisition further reinforced our view. We think POST is worth 8x – 9x pro forma EBITDA, or around $30 per share, down 40% from today’s levels.

 

POST is a holding company of packaged foods businesses each purchased at 8x – 10x EBITDA, and a secularly declining cereals business, combined trading at 10.5x forward EBITDA, despite no synergies across them, no coherency in strategy / channel / branded vs. private label / category / geography, levered over 6x. Why anyone would be excited by POST acquiring a business at 10.5x (Michael Foods) from Goldman Sachs, who purchased the business at 7.5x 4 years ago, with limited synergies, is beyond us. Especially a business which just reported Q1-14 EBITDA down 30% yoy. (Note: for our forward numbers we are using pro forma, annualized guidance from POST for its current business and Michael Foods – we see downside to both but have taken them at face value, only adjusted to annualize acquisitions for this analysis.)

 

The bull thesis essentially hinges on Stiritz being able to identify better deals than anyone else, given his track record. Michael Foods was rumored in a sale to Tyson Foods for $2bn in press reports in January. It is likely that Tyson Foods would have had some real synergies here, and yet POST still outbid them, paying $2.5Bn, with only $10mm of synergies. Sure, it is possible Stiritz sees the true value here that no one else does – but we think it is far more likely that he just overpaid. And why wouldn’t he? POST stock has re-rated to valuation levels far above the true value of these underlying businesses, so he is using that currency and the more than willing debt markets to do deals (levering over 6x with 7% rates), even ones that wouldn’t normally make any sense.

 

However, we think this will end badly. The issue-equity-to-do-accretive-deals game only works when your stock has a premium multiple – once that goes away, no more accretive deals. We think when the market figures out how expensive / levered POST is relative to its collection of assets, it will re-rate, and take the bull thesis with it.

 

In the meantime, we question how well POST will run this disparate set of businesses in areas they have no expertise in. They guided down FY 2014 EBITDA in March by $10-$15mm (ex. incremental holding company expenses) a month after issuing guidance in February, on customer losses at Dakota and weakness in core cereal.

 

We believe Core POST EBITDA declined in FY’s 2010, 2011, 2012, 2013 and is implied down in revised 2014 guidance.

 

As for Stiritz, for every $1 move in POST stock he stands to make $2.15mm…for every $1 move in HLF stock he stands to make $7.5mm. That HLF LBO he predicted hasn’t quite materialized yet (I wonder why they issued converts?) despite him hiring the uber-bull Davidson analyst to work for him personally. I suppose he is still working on the LBO math.

 

On the Michael Foods acquisition call, he said: “So this is a continuation of this very interesting, for me, a late life project, the Post story. I threw in the name Post Holdings early on and I think that that's the way it turned out, it was appropriately named.” He is not involved day to day, so I have no idea why people expect these businesses to magically become more valuable just because Stiritz purchased them.

 

He also seemed a little confused on the call at one point: “Well think about it. I was struck last Sunday while visiting – I don't know why the hell I was in the local art museum, but they got a great restaurant over there. And they had a great item, new item on the menu, which was an egg omelet. And then in the New York Times there was a feature story on the emergence of the egg as the perfect food.” So that justifies paying paying 3x more than Goldman Sachs did, because Stiritz likes omelettes.

 

The cult of Stiritz is perfectly encapsulated in WinBrun’s first comment in the thread: “I wonder if there is more than meets the eye on the Dakota acquisition given that Viterra paid $240MM for the business in 2010-it subsequently did not grow earnings very much in the proceeding three years; then one of the saviest buyers of food assets pays $370MM for it in 2013. Especially interesting in light of Mr. Stiritz's  deep knowledge of private label pasta through the American Italian Pasta acquisition.”

 

Isn’t the more likely answer that he just overpaid for this business? They have already taken down guidance thanks to customer contracts rolling off and expected new contracts not replacing them.

 

We think POST should trade 8x – 9x EBITDA, or ~$30, down 40% from current levels. We think they have limited capacity to do incremental deals for some time, and the core performance / Michael Foods performance will disappoint over time.

 

I have done some work on Michael and, despite the terrible Q1, it seems like a pretty stable FCF generator.  My concern at this point is the leverage at POST to get the Michael deal done - it is pro forma 6x levered. 

 

Thoughts?

 

[TeddyLampert]

I'm glad to read an articulation of a short thesis. It left me unconvinced that this is a great short. The author is basically arguing that the stock will derate, and this will prove harmful for Post's ability to do more accretive deals. Negative reflexivity in a nutshell. I read WinBrun's reply, and pretty much agree with those sentiments. A short case would be if the underlying business is impaired because of secular decline. Management commented that they've arrested share decline in cereal and have been growing share. I'd welcome any variant views on this. So long as the core cereal business continues to throw off cash that can service the debt, I'm not too worried at this point about the leverage. The business will also naturally delever over time. The history of Stiritz has been he is tightlipped about strategy, which does not mean there isn't one. It seems kind of obvious to me however that a lot of value can be created by pushing these newly acquired products through Post's preexisting distribution network. I also can't really tie the comment about HLF into the overall short thesis; are we saying Stiritz is distracted, or he's been wrong on HLF and therefore wrong on Post? I think the write up is a good argument for not being long Post, but actively shorting an outlier capital allocator (pardon the cliche) seems unwise.

[Guest JoelS]

Interesting article from FT, directly related to Michael Foods: http://www.ft.com/intl/cms/s/0/86c7f974-de43-11e3-ba13-00144feabdc0.html?siteedition=intl#axzz31oxVfMZr

 

When you compare this with what Stiritz said on the Michael Foods call, it all looks quite positive, at least for this acquisition. Here are some selected notes from the call:

 

michael - unique rare opportunity: 50 yrs in the business and this one stood out.

this has all the characteristics of being a superb business. great management team in a unique category and offered at a fair price. It fits perfectly to serve the interests of shareholders and debt holders.

- renoir. This is a renoir.

 

Private equity did good job but some missed opportunities because of the nature of private equity.

 

What gets you excited about the long term opportunity here?

 

(bill) has spent life in the proliferation of products. There's nothing that you can't proliferate.

How to do with eggs? - great defensible business. leading business in categories. nature's food.

getting away from addictive food habits - better lifestyle.

product of the moment - how do you create a variation where you lose market share?

high growth market - showing up more and more.

 

 

Has anyone done some work on the pro forma numbers?

[loganc]

I have done some work on Michael Foods (MFI) and I don't get how this is a good business, despite the Stiritz comments.  Obviously, I am a schmuck compared to Stiritz, so I am probably missing something.

 

However, MFI on a normalized run rate seems to be a significantly lower margin business than the branded RTE cereal business and (likely) the other smaller businesses that POST has acquired.  The positive is that MFI doesn't seem very capital intensive.  But, I have yet to fully grasp the competitive position of MFI.

 

Does anyone have any experience that would help me understand the competitive position of MFI?

[Picasso]

Looks like this jockey stock is getting hit hard today after hours.  The short thesis seems to be right on the money (so far).

[Fat Pitch]

Stiritz did a heck of a job making acquisitions with POST currency. Now it appears the premium has been sucked out so this will slow him down, unless he thinks the stock is still expensive. Anyone have any thoughts on the guidance reduction? Levering up and watching cash flow go down can get lethal quite quickly.

[Picasso]

Stiritz did a heck of a job making acquisitions with POST currency. Now it appears the premium has been sucked out so this will slow him down, unless he thinks the stock is still expensive. Anyone have any thoughts on the guidance reduction? Levering up and watching cash flow go down can get lethal quite quickly.

 

I have a hard time getting my head around something which is supposed to be cheap only because the equity is expensive (so that he can do deals with stock at 20x ebitda to buy things at 10x ebitda).  It reminds me of Sears because no matter what happens the stock should go up according to the bullish arguments.

 

The long POST writeup on VIC says how Stiritz can get to $8 of free cash flow at a 14x multiple for a $112 dollar stock in several years.  But that is $112 of 2019 or 2020 value versus 2014 value.  Given the nature of this rollup, you probably want a good discount to account for the risk along with your discount rate.

 

I might get interested in the high 20's since you would be looking at a more reasonable valuation if the acquisitions do not add as much value as hoped.  So far Michael Foods is looking like a dud based on the latest sales figures.

[CorpRaider]

Yeah high 20's is about what I've got it pegged at before it becomes a potential buy for me.  I am at a loss to understand all the talk about using the high multiple stock when it seems like most if not all of the deals have been cash deals so far.

[Fat Pitch]

I’m not convinced with the recent acquisitions. It seems like he is making a grab at anything that’s for up sale. Then again when your stock is at a high multiple in a declining industry you do something with the rich currency.

[thepupil]

Yeah high 20's is about what I've got it pegged at before it becomes a potential buy for me.  I am at a loss to understand all the talk about using the high multiple stock when it seems like most if not all of the deals have been cash deals so far.

 

they've paid for deals in cash, but have monetized the expensive stock price via convertible and common issuance;

 

 

In February 2013, the Company authorized and issued approximately 2.4 million shares of its 3.75% Series B Cumulative Perpetual Convertible Preferred Stock. The Company received net proceeds of $234.0 after paying offering related fees and expenses of approximately $7.5. The preferred stock has a $0.01 par value per share and a $100.00 liquidation value per share. The preferred stock earns cumulative dividends at a rate of 3.75% per annum payable quarterly on February 15, May 15, August 15 and November 15, beginning on May 15, 2013. The preferred stock is non-voting and ranks senior to our outstanding common stock upon the Company’s dissolution or liquidation. The preferred stock has no maturity date; however, holders of the preferred stock may convert their preferred stock at an initial conversion rate of 2.1192 shares of the Company’s common stock per share of convertible preferred stock, which is equivalent to a conversion price of $47.19 per share of common stock. Additionally, on or after February 15, 2018, the Company will have the option to redeem some or all the preferred stock at a redemption price equal to 100% of the liquidation preference per share, plus accrued and unpaid dividends if the closing sale price of the Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days during any 30 consecutive trading day period.

In December 2013, the Company authorized and issued approximately 3.0 million shares of its 2.5% Series C Cumulative Perpetual Convertible Preferred Stock. The Company also granted the initial purchasers of the preferred stock a 30-day option to purchase additional shares of preferred stock. On January 14, 2014, the initial purchasers exercised their option and purchased an additional 0.2 million shares. The Company received net proceeds of $310.2 after paying offering related fees and expenses of approximately $9.8. The preferred stock has a $0.01 par value per share and a $100.00 liquidation value per share. The preferred stock earns cumulative dividends at a rate of 2.5% per annum payable quarterly on February 15, May 15, August 15 and November 15, beginning on February 15, 2014. The preferred stock is non-voting and ranks senior to our outstanding common stock upon the Company’s dissolution or liquidation. The preferred stock has no maturity date; however, holders of the preferred stock may convert their preferred stock at an initial conversion rate of 1.8477 shares of the Company’s common stock per share of convertible preferred stock, which is equivalent to a conversion price of $54.12 per share of common stock. Additionally, on or after February 15, 2019, the Company will have the option to redeem some or all the preferred stock at a redemption price equal to 100% of the liquidation preference per share, plus accrued and unpaid dividends if the closing sale price of the Company’s common stock has been at least 150% of the conversion price then in effect for at least 20 trading days during any 30 consecutive trading day period.

 

In March 2014, the Company issued 5.75 million shares of common stock, par value $0.01 per share, at a price to the public of $55.00 per share. The Company received net proceeds of $303.5 after paying offering related fees and expenses of approximately $12.8.

[CorpRaider]

Thanks.  I remembered the issuance of the convertibles.  Seems a bit different to pick your spots via an outsider capital allocation decision to raise cash via issuance of a high multiple equity (or dequity resulting in a lower cost of borrowing) versus relying on a never ending series of stock swap acquisitions, where your currency can disappear in the flash of an eye, or a quote. 

[loganc]

I’m not convinced with the recent acquisitions. It seems like he is making a grab at anything that’s for up sale. Then again when your stock is at a high multiple in a declining industry you do something with the rich currency.

 

I understand your skepticism with the recent acquisitions, but I think the "declining industry" term to describe the RTE cereal part of POST may be a bit harsh based on my review of the performance of the "Post Foods" division.  I think the more appropriate description would be "no growth."   

 

It seems to me that the recent post-earnings bloodbath has taken out the "outsider" premium and now everyone is skeptical about the amalgamation of assets.  I saw a comment on the board recently saying  that POST was still trading at ~20x EV/EBITDA.  Does anyone have some math to support that claim?

 

 

 

 

 

[TeddyLampert]

I hope the attached file is helpful. The data clearly shows there has been an ongoing decline in breakfast foods, and specifically, weakness in cereal. Kellogg has been hit especially hard.

 

This document also shows that Post has been keeping steady in an otherwise declining sector. It's done this by promoting volume (big bags of cereal) but this has hurt pricing. There's no doubt Post faces significant headwinds, which is frustrating.

 

Anyone listen to the quarterly call? Management genuinely seemed surprised by the revenues and earnings miss and lowered guidance. It's weird that they didn't change guidance earlier this year when they issued the converts! It's either duplicity or stupidity (or stuplicity). Organizationally, they put in a new management team for Dymatize, which acknowledges things weren't ok. They really blew it with not meeting their own growth, pricing, and volume projections for the different segments. 

 

Did anyone else get to this adjusted 2014 EBITDA figure?

 

Post Foods excluding Michaels: $260-270 mm

Michaels : $75-80 mm (4 months); $232 mm annualized using the midpoint

American Blanching: $15 mm (midpoint)

-----

Total: $512.5 mm

 

EV = $5.16 bn

 

EV/EBITDA = 10x

 

At 10x, it's not the most expensive thing in the world. Kellogg trades at 11.3x 2014 EV/EBITDA; same thing with General Mills. POST is however much more levered than K or GIS, which is the big risk factor for a de-rating if there's no signs of business progress.

 

 

 

GSR_081214_231210.pdf

[CorpRaider]

Yeah that's about where I was when i did a quick and dirty on it recently.  I just filed it as @ a 10.0 EV/EBITDA and data dumped the rest.  As a former HSH shareholder I know Jimmy Dean has been successful in taking share in breakfast with their sandwiches.  Maybe with consolidation in the proteins they will raise prices and drive people back to cereals.  I am personally sceptical of any "permanent change" in breakfast preferences.  It seems more likely the high protein, paleo diet and the no dairy knives over forks trends are fads that will fizzle in the face of cost and convenience over time, but it is truly currently hurting the industry.

[Fat Pitch]

Yeah that's about where I was when i did a quick and dirty on it recently.  I just filed it as @ a 10.0 EV/EBITDA and data dumped the rest.  As a former HSH shareholder I know Jimmy Dean has been successful in taking share in breakfast with their sandwiches.  Maybe with consolidation in the proteins they will raise prices and drive people back to cereals.  I am personally sceptical of any "permanent change" in breakfast preferences.  It seems more likely the high protein, paleo diet and the no dairy knives over forks trends are fads that will fizzle in the face of cost and convenience over time, but it is truly currently hurting the industry.

 

I don’t think it’s a fad. There’s more scientific data coming out showing carbs & sugars being associated with cancer, heart disease and diabetes. It comes down to how food is metabolized into prostaglandin E2/D2 and cox-1/2. As technology advances so does our understanding how our bodies function. It reminds me of the early days when people started to realize the link between lung cancer and cigarette smoking.

[CorpRaider]

Well, that's what makes a market.  Honey bunches of oats are good and with almonds and almond milk they're pretty good for you.  If kids are precluded from becoming addicted to sugary cereals there might be a problem.  It's funny, cornflakes were invented as a healthfood alternative to fatback, bacon and eggs and now everyone wants jimmy dean sausage biscuits for breakfast. 

[jouni1]

no, honey bunches are not good for you.  ;D even with almond milk. also (lower class) kids being precluded from this processed sugar junk would be a jackpot for the human race, if not the shareholders.

[CorpRaider]

Yeah well you finns drink entirely too much coffee.  ;D

[jouni1]

we do yes :D we also eat way too much sugar and flour like everybody else. i'm just saying that there probably isn't a "healthy" cereal. but that's probably obvious.

[KCLarkin]

I saw a comment on the board recently saying  that POST was still trading at ~20x EV/EBITDA.  Does anyone have some math to support that claim?

 

I was just using TTM EV/EBITDA from Yahoo Finance. This obviously doesn't factor in recent acquisitions and so is not reflective 2014 financials.

[Picasso]

http://www.reuters.com/article/2014/08/19/bumblebee-sale-idUSL2N0QP0WA20140819?feedType=RSS&feedName=privateEquity

 

Would amount to a fairly large acquisition for POST.

[loganc]

I hope the attached file is helpful. The data clearly shows there has been an ongoing decline in breakfast foods, and specifically, weakness in cereal. Kellogg has been hit especially hard.

 

This document also shows that Post has been keeping steady in an otherwise declining sector. It's done this by promoting volume (big bags of cereal) but this has hurt pricing. There's no doubt Post faces significant headwinds, which is frustrating.

 

Anyone listen to the quarterly call? Management genuinely seemed surprised by the revenues and earnings miss and lowered guidance. It's weird that they didn't change guidance earlier this year when they issued the converts! It's either duplicity or stupidity (or stuplicity). Organizationally, they put in a new management team for Dymatize, which acknowledges things weren't ok. They really blew it with not meeting their own growth, pricing, and volume projections for the different segments. 

 

Did anyone else get to this adjusted 2014 EBITDA figure?

 

Post Foods excluding Michaels: $260-270 mm

Michaels : $75-80 mm (4 months); $232 mm annualized using the midpoint

American Blanching: $15 mm (midpoint)

-----

Total: $512.5 mm

 

EV = $5.16 bn

 

EV/EBITDA = 10x

 

At 10x, it's not the most expensive thing in the world. Kellogg trades at 11.3x 2014 EV/EBITDA; same thing with General Mills. POST is however much more levered than K or GIS, which is the big risk factor for a de-rating if there's no signs of business progress.

 

Thanks for posting the research report.  Good stuff.  Your math looks right to me.

[mevsemt]

If you're trying to back into the annualized EBITDA assuming a full year of results for recent acquisitions, the 512.5 MM is too low because 1) the 260-270 MM only includes partial year results for the acquisitions made before Michael Foods (Dymatize, Golden Boy, Dakota), and 2) it looks like PowerBar wasn't included (which is expected to close Q1 2015). 

 

Here's what I'm getting for annualized EBITDA by segment:

 

POST plus all acquisition made before MFI: 281-301 MM

MFI: 242-262 MM

PowerBar: 15-17 MM

AB: 14-16 MM

 

Total: 552-596

 

Plus:

Modesto plant closing: 14 MM

MFI synergies: 10 MM

 

Grand Total: 576-620MM

 

Current share count: 51 MM

Max future share count, depending on conversion of TEU's and preferreds: 61 MM

 

Net Debt (based on Q3 balance sheet w/ cash reduced for PowerBar and AB): 3695 MM

[TeddyLampert]

Mevsemt,

 

Thanks for the helpful clarification. Just a question: where did you get the proforma for Post plus all acquisitions made before MFI of $281-301mm?

 

So, just to wrap this up, in terms of current valuation:

 

With adj proforma annualied EBITDA of 576-620 mm

 

MC= 1620

ND= 3695

EV = 5315

 

EV/EBITDA = 8.6- 9.2x

 

---

 

Lastly, I got this from the earnings call:

 

"At quarter-end, there were 44.8 million shares of common stock outstanding, excluding the impact of any convertible securities."

 

I note that the current market cap of $1620 is equal to 44.8m x $36.15 (current share price). Where are you getting your 51 mm share count? Just seeing if this is affecting how you are looking at valuation.

 

Thanks

 

[loganc]

Teddy,

 

I think his 61MM FD share count is roughly correct.  My math is as follows:

 

Share Count (@5/6/14): 38.47

Common Issuance: 6.33

Current Count: 44.8 

Tangible Issuance: 6.03

Series B Preferred: 5.09

Series C Preferred: 5.91

Total Count: 61.82

 

Also, I think the valuation is starting to get interesting.  I believe the restated guidance  represents a lowball of the capabilities of the businesses.