Why I Like This Cereal Business

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Mario Gabelli, a famous investment manager, has beaten the S&P 500 by 2% per year for more than 25 years. In the Barron’s Roundtable this year, Mario Gabelli has discussed several stocks that he likes, including Hillshire Brands, a leader in meat-centric food solutions. In this article, I would talk about one more business that he recommended in the Roundtable: Post Holdings (NYSE: POST)

Third largest player in the US cereal market

Post is the manufacturer and distributor of ready-to-eat cereals in the US and Canada with several brands, including Post Selects, Great Grains, Honey Bunches of Oats, etc. Post reported to be the third largest company in ready-to-eat cereals in the US market, with a 10.4% share of retail sales. The products were divided into three different categories: Balanced, Sweet, and Unsweetened. Post said that it had a long and stable relationship with key customers in all distribution channels, including retail chains, grocery wholesalers, drug stores, and Foodservice distributors. In fiscal 2012, the ten largest customers accounted for around 55% of the total gross sales. Wal-Mart, the largest customer, represented around 21% of net sales. Actually, Post is the spin-off from Ralcorp Holdings. Interestingly, William Stiritz, the chairman and CEO of Post, was the chairman of Ralcorp for nearly 30 years. 

The CEO with $1 base salary

If the executives were rewarded based on long-term business performance, investors would be better off in the long run. In a three-year employment agreement between Post and Stiritz, Stiritz would receive a base salary of only $1 per year. The majority of the payment would be in the form of stock options. In the 2012 proxy filing, the company wrote:

In May 2012, the Compensation Committee granted Mr. Stiritz 1,550,000 non-qualified stock options, at an exercise price of $31.25 per share, the closing price of our stock on the date of grant, which generally vest in equal installments on the first, second and third anniversary dates of grant. These options are intended to constitute substantially all of Mr. Stiritz’s compensation for his service as Chief Executive Officer of the Company during the three-year term of his employment agreement, absent special circumstances.” 

I personally like this compensation arrangement because his benefits will be aligned with shareholders’ interests. Even with a $1 base salary, Stiritz’s total compensation was nearly $22.7 million in 2012, including $9.76 million in stock awards and $12.85 million in option awards. Mario Gabelli liked Stiritz. He said that Stiritz was a proven money maker.

Earnings expected to grow in near future

As of September 2012, Post reported to have $1.23 billion in total stockholders’ equity, $930 billion in long-term debt, and $58 million in cash. It booked a huge amount of goodwill--nearly $1.4 billion. The intangible asset amount was also high, at nearly $740 million. In 2011, Post lost nearly $425 million. The loss was due to a $566 million impairment of goodwill and intangible assets. The operating cash flow has been positive for the last 4 years. In 2012, it generated $144 million in operating cash flow and $113 million free cash flow. At the current price of $37.95 per share, Post is worth $1.24 billion in the market. It is valued at nearly 9.9x EV/EBITDA. Mario Gabelli expected that Post would earn $1.50 per share in this year. The earnings might even grow to $3 per share in the next 3-4 years. 

Peers comparison

Post is considered the smallest company in comparison to its peers, including General Mills (NYSE: GIS) and Kellogg (NYSE: K). General Mills is worth nearly $27.22 billion in the market, while Kellogg is worth more than $21 billion. Among the three, General Mills generated the highest operating margin of 17%. Post’s operating margin was 16%, whereas the operating margin of Kellogg was the lowest at 14%. In terms of valuation, General Mills and Post are both valued at around 9.9x EV/EBITDA, while Kellogg is considered the most expensive company with 12.1x EV/EBITDA. Those three companies are the three biggest players in a cereal market. Kellogg has the biggest market share at 34%, while General Mills came quite close at 33%. Post, as mentioned above, ranked third with a 10.5% market share.

My Foolish Take

As Mario Gabelli said about Post: “You want to buy cash-generating companies with pricing power that have had some sort of short-term hiccup. They must be run by CEOs who understand how to create value. The sun, moon, and stars are aligned at Post.” Personally, I would consider Post a buy at the current price. 

hoangquocanh has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus