How Ralcorp Can Unlock Value
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Ralcorp Holdings (NYSE: RAH)
(This write-up is an edited and abbreviated pitch pulled from the SumZero community. It represents a fraction of the full report.)
Recommended Action: Long
Current Price: $86.00 Target Price: $105.00
Source: Hedge Fund. New York, NY
Ralcorp is the largest publicly traded private label food manufacturer in the US, competing in the cereal, cookie/crackers, snacks/sauces/spreads, refrigerated/frozen bakery and pasta categories. The company also competes in the branded cereal category (#3 market share position) with its Post cereal brands.
Ralcorp Holdings is trading at a discount to most of the packaged food group, and most especially to TreeHouse Foods (NYSE: THS) – its closest comparable, a pure-play private label food manufacturer.
During the first quarter of 2012, Ralcorp will be spinning off its Post-branded cereal business to shareholders via a tax-free spin-off and will re-focus its efforts on consolidating the $90+ billion private label food industry. Ralcorp’s valuation gap to TreeHouse should narrow over time, driven by continued execution of a now-shareholder friendly management team. At a TreeHouse multiple, Ralcorp should be worth $105 per share, or +22% upside from current levels, which given Ralcorp’s low-beta and favorable current private label volume trends is a great risk-reward.
There are external factors at play that could help narrow the valuation gap, if not allow for Ralcorp valuation to exceed that of TreeHouse. ConAgra Foods (NYSE: CAG) could come back for the Ralcorp private label business. ConAg has made three public bids to acquire Ralcorp ($82, $86 and the latest at $94) to coerce Ralcorp management to abandon their Ralcorp-Post spin-off and negotiate a deal.
Furthermore, Ralcorp & TreeHouse could consider a merger/acquisition to create a private label powerhouse. The deal would likely be highly accretive to Ralcorp, depending on the debt-equity split, market valuations at time of announcement and synergy potential. Finally, private equity players could also show interest in Ralcorp given the strong free cash flow generation, though the lack of synergy potential would limit the upside in their bids relative to a strategic player.
I believe that Ralcorp represents a compelling risk-reward and presents reasonable upside for a low-beta consumer staple from current levels. Given the presence of several catalysts over the next twelve months, I believe that valuation gap between Ralcorp and TreeHouse will narrow in time.
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