Friday, November 22, 2013

Post Holdings (POST)

OK, so nobody is going to believe me again.  People will think I am just sitting here watching TV and then when I hear something interesting, I look stuff up and make a post about it.  Well, there's nothing wrong with that but that's only part of the story.

I was looking at POST in the past few days for a number of reasons.  I know you are tired of hearing this, but POST is run by an outsider CEO, William Stiritz.  Of course, I knew this and you knew this.  POST was obviously worth a very close look as:
  • It's an outsider CEO company and
  • It's a spinoff and has the classic signs that Greenblatt talks about in his Genius book (segment suffering from 'benign neglect' for years, ripe for some focused (and incentivized)  improvements via spin-off).

So this is a perfect candidate for a post here (and for a position in any value investor's portfolio). 

What got me to look at this in the past few days was Stiritz making headlines.  He took a big stake in Herbalife (HLF) and said he wants to help do something to get Ackman off their back.  He filed a widely reported 13-D with this note:
Item 4. Purpose of Transaction.
The Reporting Person has analyzed the Company and concluded that it has a sound business model, a strong distribution system and a positive outlook for long-term growth opportunities. The Reporting Person believes that the Company’s market capitalization is undervalued at this time. The Reporting Person plans to interact with Company management to offer them, for their consideration, his views, advice and counsel for ways of promoting and furthering the Company’s shareholder interests. The Reporting Person’s views, advice and counsel may address a wide variety of matters, including ways to further leverage the Company’s strong distribution system, potential financing and/or recapitalization strategies, potential stock repurchase programs, and potential strategies for confronting the speculative short position that currently exists in the Company’s stock and its attendant negative publicity campaign. The Reporting Person may, from time to time (i) acquire additional Shares and/or other equity, debt, or other securities of the Company, (ii) dispose of any or all of his Shares or any other such Company securities, and (iii) engage in hedging or similar transactions with respect to the Shares.

This is fascinating on its own, this ongoing drama; sort of a battle of the titans. 

He owns 6.5 million shares ot HLF which is a stake of $460 million; that's huge.  Stiritz owns 370,000 shares of POST and has options on 1.55 million shares (at a $31.25/share strike price) for a total stake (if options exercised) of $90 million.  That shows you how strongly he feels about HLF.  The POST stake seems a little small, but this is not a founder/owner-type situation and ownership stakes tend to be small in those cases so it's not too much of an issue.

So anyway, that was the trigger for me to pull up some information on POST.  I have been going through the financials (not much since this is a new entity) when CNBC had on a Tiger cub fund manager named Nehal Chopra.

Tiger Ratan Capital
So Nehal Chopra is a Tiger cub; her fund was seeded by Tiger Management (Julian Robertson).  Again, Julian Robertson is a legendary hedge fund manager, but importantly (for us value investors), he is a hard core fundamentals-based value manager.  Robertson and his cubs are known for very deep research.  They won't invest until they do extensive work on the companies and especially their management. 

So of course, I turned around today to watch when I heard this Tiger cub talk about POST.  First of all, Tiger Ratan Capital focuses on corporate change which often causes dislocations and mispricings.  They seek to double money in three years.

Ralston 2.0
For POST, her comment was that the cereal business is a very stable business but at POST has been undermanaged for years, and after the spin-off they are fixing it up.  The most exciting part of POST is the CEO, Bill Stiritz, who at Ralston returned 21%/year for 21 years (that's even higher than the +20%/year for 19 years in the Outsiders book.  See the table in the post). 

She feels that POST is Ralston 2.0 (the only problem is that Stiritz is 78 years old, so we may or may not get another 21 years).

So a fund manager talking about a stock is no big deal, usually, even if it's a stock you like.  You just say, well, OK...

Charter Communications (CHTR) and Valeant Pharmaceutical (VRX)
But what was very interesting to me was that she went on to mention two of her other favorites; Charter Communications (CHTR) and Valeant Pharmaceutical (VRX).   I mentioned CHTR here and do like the stock and what Malone/Rutledge are doing.  Chopra said that CHTR looks good even without a Time Warner Cable deal.  Their capex should come down going forward and they have a lot of free cash flow.

For VRX, she explained the business model; that other small pharmaceuticals spend a lot of money on R&D but in aggregate their return on investment (in R&D) is negative.  So VRX doesn't do that and just buys companies with successful products.

I haven't done a post on VRX, but it was mentioned in the comment section of one of my posts and it
is a big Sequoia position and is sort of an outsider CEO-type situation.

So needless to say, we seem to have similar taste! 

Of course with a manager like this we have to take a look at what else they own.  Here's a link to the recent 13F:  

Tiger Ratan Capital holdings as of September 2013


Back to POST
Anyway, back to POST.  It's a spin-off from early 2012 so in the world of spin-off investing, it's still pretty fresh.  It has all the things that you want; an incentivized, competent management, a business that has been neglected for a long time in a stable industry etc.

Plus we already know about Bill Stiritz.  These things alone make POST very interesting.

But what is exciting about POST is the new businesses that they are investing in.  They have made some acquisitions this year and will close one next year.

Their Attune Foods business (which includes the Hearthside businesses they bought) gives them exposure to organic, non-GMO cereals and snacks and private label granola business.  Natural and organic cereals have a high single-digit growth rates.  And the acquisition is cash accretive in 2014.

Premier Nutrition acquisition represents a three-fold opportunity (according to the 4Q2013 conference call):
  1. Access to double-digit growth of sports nutrition and weight loss category.
  2. It's POST's first out-of-the-bowl eating experience with Premier line of shakes and bars.
  3. Platform from which to initiate roll-up opportunity as industry consolidates.
This is also cash accretive in 2014.  Premier also gives POST knowledge of science of protein.

The Dakota Growers (pasta) acquisition expands the private label business and is also cash accretive in 2014.  Dakota also creates an attractive strategic growth platform (through acquisitions).

So all of these acquisitions seem to have in common higher organic growth rates, platform for future growth through acquisitions while being cash accretive.   That's good!

Valuation
OK, so let's just take a quick look at this.  First of all, POST doesn't look so good on conventional measures like P/E due to the high debt.  There were also a bunch of charges and expenses related to the spin-off and restructuring.

So let's look at what is more important in these situations; EV/EBITDA, free cash flow and things like that.

Fiscal 2013
First of all, they just released their fiscal 2013 results (year ended in September).  Their adjusted EBITDA came in at $216.7 million.   Capex for the first nine months was $18 million, so just annualizing that and assuming $24 million in capex in 2013, that's free cash flow of around $193 million  (capex will be in the 10-K which hasn't been filed yet).

POST closed at around $47/share, so with 33 million shares outstanding, that's $1.6 billion market cap.  They have $1.4 billion in long term debt or $1.0 billion net of cash (which is pretty much going to the purchase of Dakota Growers which will close early 2014).  So that's an enterprise value of around $2.6 billion.

So on fiscal 2013 figures, that comes to 12x EV/EBITDA and 13.5x free cash flow.   That's not expensive at all.  Just plucking easily accessible figures, here are some EV/EBITDA for some comps:

                                   EV/EBITDA (ttm)
Kellogg                      13.3x
General Mills             11.7x
Kraft Foods Group     10.0x
Campbell Soup          11.4x

So just looking at the EV/EBITDA of the past twelve months, the valuation looks pretty normal and within reasonable range.  But then again, we are comparing this to companies with little or no growth, and our assumption is that POST is going to grow rationally and profitably, outsider CEO-like.  In that sense, this 'normal' valuation may in fact be very attractive.

They did offer up guidance for 2014. 

2014 Guidance
Adjusted EBITDA:  $245 - $260 million.
Capex:   $65 - 75 million

Using the midpoint of each would give us $252 million in adjusted EBITDA and $70 million in capex.  That gives us free cash flow of $182 million

So the current $2.6 billion enterprise value gives us an EV/EBITDA of 10.3x (this may be fairer as 2013 didn't include full year of 2013 acquisitions but the full balance sheet value was included in EV at September-end).  That's 14.3x free cash flow, though, but still a free cash yield of 7%.  This free cash yield includes all the capex for organic growth, but obviously not growth that will come from acquisitions. 

Conclusion
This is just a quick look at POST, but it looks pretty interesting.  I don't know that you want to compare valuations too much with other food companies that are really big and slow growth.  I would look at POST more as a special situation; as a company in transition run by an outsider CEO.  Plus it's a spin-off play and a relatively fresh one at that as spin-off returns usually are the best a couple of years or more out.

Also, some of the slow-growers in the grocery category are big and find it hard to find incremental growth.  POST may have an advantage there too as they are still pretty small and therefore nimble.

Here are some revenue figures to compare (POST is for the recent year-ended September 2013; others are whatever the most recent full year was):

POST:                  $1 billion
Kellogg:             $14 billion
General Mills:    $18 billion
Kraft:                   $4.5 billion
Cambell Soup:     $8 billion

This is not to say that POST can get to $14 billion or $18 billion in sales.  Not at all.  It's just a lot easier to grow a company with a smaller revenue base.  A $100 million idea will have a much bigger revenue impact on POST than on say, Kellogg.  Obviously this applies to acquisitions too.  An acquisition too small for the other companies may have a reasonable positive impact on POST (larger pond to fish in).

So what's not to like?
  • Greenblatt-style spin-off play
  • Outsider CEO
  • Reasonable valuation (I only say reasonable because I haven't done the work to declare it really cheap)





53 comments:

  1. I like Post and bought it after the spin. I have been overjoyed to discover how good Stiritz is (bought back stock cheap, borrowed when money was available, purchased Attune for the management & then bought them a much bigger platform), even before reading Outsiders. What keeps me from buying more is the convertible preferred stock - why did he issue that? He effectively sold 15% of the company at $47 per share, and we pay the buyers dividends until they exercise!?

    ReplyDelete
  2. Hi, good for you. I took a quick look at it too but didn't do anything. I don't have any figures handy, but I think this year the market was favorable for equity linked securities like convertible preferreds. Don't forget, the stock price was a lot lower back in February so there was a premium. The key issue is what the deal did for financing cost and my guess is that it lowered it considerably. Others have issued similar things for similar reasons; low interest rates plus strong equity market = good time to issue this type of security.

    Thanks for reading.

    ReplyDelete
  3. Thanks for posting about POST. I just finished reading "that" book and started looking up all the people and companies talked about in the book when I stumbled across your blog. A few questions (couple related to $POST and one in general):

    1. Is the '14 Guidance from POST management? If yes, that does not seem like an outsider trait. Not that it affects my decision when valuing the company but just curious. Your thoughts?

    2. In your '14 guidance section you said "free cash yield includes all the capex for organic growth, but obviously not growth that will come from acquisitions". Why would the estimated FCF account for capex but not the earnings from acquisitions?

    3. Your thoughts on ratios like EV/EBITDA, ROI, ROE, FCF multiple for market cap? I know which ones are in the 'lower the better' and 'higher the better' but 'am finding it difficult to estimate reasonable values for these ratios. It is better to be approximately correct than precisely wrong. So what are your thoughts on these ratios to arrive at a fair price for a good businesses?

    ReplyDelete
    Replies
    1. Yes, the guidance is from management. And yes, I guess it's not really outsider-esque to give guidance. But I think the point is more that outsider CEO's don't give detailed guidance on a quarter-to-quarter basis and fine tune it. Either way, I don't think it's a big factor. Some companies are easier to give guidance for than others. The packaged food/cereal business is very stable so giving guidance is possible. But for something like Berkshire Hathaway or the old Leucadia, that would be impossible as there are too many moving parts.

      The free cash flow guidance includes all capex for existing businesses because they can plan for that. They plan on doing acquisitions too, but they can't possibly know what they will buy over the next year. They will only do deals when a good deal pops up, and that's not predictable at all. Maybe they have some stuff in the pipeline; deals that they are looking at. But most of these acquisitive companies will guide free cash flow excluding future acquisitions.

      I don't have any rule for those ratios. I think every company and situation is different so there are no hard fast rules. In the case of POST, I think ROE/ROI is meaningless as they have a big chunk of goodwill on their balance sheet. I think the key for POST is EV/EBITDA and free cash. Of course free cash is way more important, but the market does look at EV/EBITDA to value businesses. On that basis, as I say above, POST looks within range of other food companies so looks very interesting. I can't fine tune it and tell you what ratio it should trade at, though.

      Thanks for reading.

      Delete
    2. Isn't ROIC especially meaningful for companies that do a lot of acqusitions and have a lot of goodwill? It measures whether those returns have been additive to profitability or not, because the numerator (NOPAT) captures the earnings from those deals while the denominator (invested capital) includes goodwill which reflects the preimum paid for deals. Otherwise, why not go nuts and pay too much for all kinds of deals, generating higher earnings, but reducing tangible equity, thereby making ROTE look good but ruining the business?

      Delete
    3. Hi,

      You are right. Goodwill counts as part of invested capital; it is money they dished out at some point to acquire a business. So maybe saying it is meaningless is an overstatement. Higher is better, of course, in these metrics.

      These companies, though, are often valued on free cash and EV/EBITDA.

      Thanks for reading.

      Delete
    4. Oops, I forgot to mention, also, that for example ROE can be distorted for leveraged companies. A business can look good operationally but awful on an ROE/ROIC basis due to the leverage. If someone can take out the entire company with cash and eliminate debt (and therefore interest expense), their cash-on-cash return might be quite attractive. The cable industry in the past was a great example of that.

      That's why people focus so much on EV/EBITDA and things like that because it shows you the capital structure neutral view of he business/valuation.

      Delete
  4. Shouldn't the EV for 2014 exclude the 370 mio cash that they are paying for Dakota Brands? Enterprise Value would then be closer to $3 billion against free cash flow of $182 million?

    ReplyDelete
    Replies
    1. Hi,
      Actually, POST announced a $450 million debt offering in November which will be used to buy Dakota, so my calculation should be fine. Either way, the cash offsets the debt on the b/s. If you take away the cash assuming Dakota was already purchased, then you have to add whatever EBITDA Dakota will generate... You can't change the denominator without a corresponding adjustment to the numerator.

      Thanks for reading.

      kk (going out as anonymous for some reason... I don't know how these things work!)

      Delete
    2. Thanks for your reply! I guess it depends on what is included in the 2014 mgmt ebitda forecast! It's not really clear to me!

      Delete
  5. Your FCF calculation is not correct...Adj. EBITDA - CapEx would give you a proxy for unlevered FCF. That is fine, but with a levered entity like this, you certainly need to back out cash interest on their $1bn+ in debt to see what the true FCF available to equity holders is.

    -High yield guy

    ReplyDelete
    Replies
    1. Hi,

      You are right, but I am looking at EBITDA - Capex as a more reasonable substitute for EV/EBITDA, an unlevered measure. If you want to do free cash to equity, then yes, the calculation will be different.

      Delete
  6. Sorry for chasing through the different posts... could you please update the book store, surely there should be at least 50 books there :) ? (the outsiders is not even on...)

    Thanks and sorry again.

    ReplyDelete
    Replies
    1. Hi, thanks for your interest in the store. Yeah, I should put more books in there. I have been lazy about that.

      Anyway, the Outsider book actually is in there but in the 'business' section, not the investment books section.

      I will try to add books in there now and then.

      Thanks for reading.

      Delete
  7. Would be interested to hear other people's opinion of lesser known "Outsider" CEO's?

    ReplyDelete
    Replies
    1. Hi,

      Ever since I posted about the book, people have suggested many names that fit the mold, including Colfax and FRMO which I decided to make new posts about.

      I would love to hear other ideas and I'm sure other blog readers would love to too.

      Thanks for reading.

      Delete
  8. I'm really intrigued to get my hands on PAH stock when it converts to NYSE as Platform Specialty Products. Currently suspended trading on LSE as PAH. Martin Franklin (Jarden), Nicolas Berggruen (homeless billionaire), Bill Ackman and a family-owned, owner-operator CEO who has an incredible track record at predecessor company MacDermid. NYSE listing (I believe) second week of December. Take a look!

    ReplyDelete
    Replies
    1. Thanks for the tip. Ackman did mention this SPAC in a recent letter. So they closed on a deal and are moving the listing to NY. That should be very interesting. Kind of like Burger King...

      Delete
    2. The name Nicolas Berggruen has a bad ring to me. A couple of years ago he bought the German department store chain Karstadt for EUR 1 (they were more or less insolvent) promising to bring it back to old glory. Kinda. What happend so far is that lowered labour costs, sometimes with questionable methods and drained a lot of money, mainly via trademark rights. His latest stunt was partly selling the buildings to another investor while at the same time buying shares in the other investors fund. The fund would benefit from rising rents whereas this would probably finish the company.

      Just thinking aloud. I followed the story for the last few years and wonder what role Mr Berggruen would play in PAH.

      Delete
    3. Hi,

      Thanks for the input. I don't know Berggruen at all other than the few articles about his eccentric homelessnes etc. One of their SPACs was an utter disaster; (the one that merged with Prisa). I don't know who does what in this partnership.

      But I do like Ackman's involvement (even though it looks like he is just an investor while he was a co-founder in Justice), and MacDermid looks very interesting.

      I am working on a post on this so stay tuned.

      Delete
  9. Rookie question: could you describe why EV/Ebitda is a better valuation metric than P/E in situations like POST?

    ReplyDelete
    Replies
    1. Hi,

      That's a good question. There are other measures like EV/EBIT, EV/EBITDA - capex and things like that. The answer is that a lot of businesses are valued on an EV/EBITDA basis. There are problems with it, of course, as it doesn't include maintenance capex which is a real cost.

      But the main reason EV/EBITDA and other EV measures are used is because it tells you what the business can earn regardless of capital structure; if you paid cash for the whole damn thing (paid for the equity and paid back all the debt), what would your cash-on-cash return be?

      P/E ratios will include interest expense which may depend on capital structure etc... So a P/E might be really high but if they are leveraged and are paying high cost in interest expense, a cash buyer that pays back the debt would possibly make high returns.

      This is why Greenblatt uses EBIT/EV for his magic formula valuation. It is a capital structure neutral look at the business and how it is valued in the market.

      I don't know if that was a good explanation...

      Delete
  10. Similar in a post mentioned earlier, I think their FCF is not 182M. This is EBITDA - CapEx . Whichever metrics you would like to do comp on is fine, but I think we should at least make sure we are talking about the same concept.

    Their free cash flow is actually around 100m if you back out the one time charges such as restructuring and etc., and subtract the interest expense. POST's current FCF yield is lower than the matured food companies.

    However, this is not to say this will be a bad investment. The thesis of following outsider CEO remains intact. There's a 20% EBITDA jump from this year's figure to next year's estimate. The CEO's done it before in Ralston and he could do it again. Especially in a levered cost structure, profit increases will greatly benefit the common.

    One thing I'm worried about is his age, and the other I don't understand is if he is sure he can do it, why does he only has about 2% of the total shares? Remember this is the guy who paid a huge stake 6.8% in HLF, who sure can afford the stake in POST his own company. How much did he own in Ralston?

    ReplyDelete
    Replies
    1. Yes, that is unlevered free cash. I think that is fine to look at in leveraged situation when the leverage is not necessarily constant. I think the model in some of these acquisitive entities is to acquire, then pay down debt etc... So I like to look at what the cash-on-cash return would be if someone just bought the whole thing.

      I actually don't mind in these situations if the unlevered free cash is higher here than others but lower on a levered basis because that just tells you that it is just an issue of cost of debt and/or leverage but says nothing about what the business is worth capital structure neutral (if it is cheap enough, then a higher grade credit can buy it or cash rich entity can buy it and realize the high free cash flow yield instantly by reducing or eliminating the interest expense; that's why there would be valuation support on EV on an unlevered basis).

      The EBITDA jump expected next year is mostly from the acquisitions done this year so that's already done.

      And yes, as Ackman pointed out, Stiritz is an octegenarian (well, almost). So I don't think this is something you can look at for a 10 or 20 year view. But I think 3-5 years out should be OK. But yes, I suppose there is an event risk here too if he gets sick.

      But you know, like someone said, these billionaires tend to be tough. Someone mentioned Sumner Redstone hanging out of a hotel window in a fire to live... So even if it's a risk I wouldn't worry too much about it.

      And yes, he doesn't own much of POST and he usually didn't own more than 1 million shares at RAL either. He recently owned 1.5% or so, but a quick look at the proxies show that at his peak he only owned 4% or so, but still under 1 million shares (something like 850,000 shares).

      So this is a case of an outsider CEO but not really an owner-operator or founder situation, so it's not that much of a concern. Davita's CEO doesn't own much either.

      Actually Munger doesn't own much BRK either even though he might as well be an owner-operator type no less than Buffett. I guess some people have other uses for their capital and don't need to have it tied up in their companies even if they believe in them.

      Druckenmiller made an interesting comment the other day on Bloomberg TV saying that when his hedge fund did a study on insider buying/selling and who were good timers on their own stock, Stiritz was by far the best timer bar none. So I guess if we ever see Stiritz buying POST in the open market, we have to back up the truck...

      I'm sure you saw the segment, but Druckenmiller said he bought HLF just on Stiritz' purchase; if such a great asset allocator, the best, is going to put so much of his own net worth in a company, then you gotta go with it. No need to have an opinion or any knowledge of HLF. If you know Stiritz, that's enough.

      Anyway, thanks for the interesting discussion.

      Delete
  11. Happy Thanksgiving to you KK and everyone.

    ReplyDelete
  12. Hello, thanks for your amazing blog, it´s a lot of pleasure to read and recheck your analysis. Concerning another outsider CEO: maybe you could check Strayer Educations Robert S. Silberman (now chairman). In his letters to shareholders he puts strong emphasis on capital allocation. And at current valuations levels they should buy back a lot of stocks, as they did in the past. So far the former buybacks haven´t created any shareholder value, but the valuation seems to be very depressed and there is lot of space for improvement. What do you think about Strayer?

    ReplyDelete
    Replies
    1. Hi,

      Thanks. I did look at some for-private education companies in the past and again when they had problems, which I think is sort of still ongoing. I don't have a strong opinion on them in general even though it really looks like a great opportunity now to pick through the winners. If Silberman is a good, outsider-like CEO, Strayer may be a good way to go.

      I may take a look later, but for now I don't really have an opinion.

      Thanks for the tip.

      Delete
  13. I just had a quick look at STRA. Margins, both net and operating, as well as FCF (Cash from Operating Activities - CAPEX in my world) look incredible. Not just in 2012, also for the last couple of years. Am I missing something ? How can it be that those guys print cash like the Fed ?

    ReplyDelete
    Replies
    1. Hi, sorry for the late response. Look at the revenue and profit trends. There was a lot of growth and now they are shrinking largely due to changes to subsidies of tuition by the government. Washington Post got caught up in this too (education is a big part of their business). So where the normalized level when things settle down, i think, might still be a question mark. That's why it looks cheap at the moment... I don't have a view on this at this point.

      Delete
  14. http://biz.yahoo.com/e/131210/post8-k.html

    "On December 10, 2013, Post Holdings, Inc. (the "Company") announced the pricing of its offering of 3,000,000 shares of a newly created series of convertible preferred stock to be designated as its 2.5% Series C Cumulative Perpetual Convertible Preferred Stock (the "Preferred Stock"). The Company also has granted the initial purchasers of the Preferred Stock a 30-day option to purchase up to an additional 450,000 shares of Preferred Stock"



    "The holders of the Preferred Stock will have the right at any time to convert each share of Preferred Stock into shares of the Company's common stock at an initial conversion rate of 1.8477 shares of the Company's common stock, which represents an initial conversion price of approximately $54.12 per share of common stock, plus cash in lieu of any fractional shares. The conversion rate, and thus the conversion price, will be subject to adjustment under certain circumstances"

    Could you please explain the process on making a judgment if these preferred are a good purchase? Many thanks.




    ReplyDelete
    Replies
    1. Hi,

      I don't have any figures immediately handy, but you would just compare what the preferreds would yield without the conversion feature; whatever coupon you are giving up is what you are paying for the conversion feature, which is basically a slightly out of the money call option. In this case, it seems like a perpetual call option so looks valuable.

      Not a great comparison as it's not the same in terms of seniority, but they did issue bonds recently at 6.75% coupon. These were senior bonds so it's above the preferreds. But for simplicity, let's ignore that. You are essentially paying 4.25%/year for the right to convert the preferreds into common stock at $54/share.

      I don't have time now, but that's sort of how to think about it. You can play with an option model to see what the optionality is worth. Just use some long time to expiration since it's perpetual...

      Delete
  15. Hi,
    Started reading your blog few months ago. Thought I'd give back something. NDSN may be worth your time. My summary: high quality company that looks expensive by traditional metrics (cost spends behind you, revenue ahead of you). Rebound in capex by CPG companies as well as semi capex spends will translate to top/bottom line growth. Well incentivized mgmt.

    ReplyDelete
  16. Hi KK,

    Do you have any thoughts on the recent spate of convertible preferred share issuances and the equity offering? These would be highly dilutive to the share count if/when exercised. This does not seem to be in keeping with a capital allocator who is known to reduce share count, not add to it. Any thoughts?

    Thanks

    ReplyDelete
    Replies
    1. Hi,

      They are now in expansion / acquisition mode, so I think it's good. They are taking advantage of strong markets and low interest rates, which is what good capital allocators should do. Capital allocation isn't just about buying back stock.

      If you look at Teledyne, for example, shares outstanding grew a lot between 1961 - 1970 because they were growing. And then when things changed, they repurchases shares aggressively. So they went both ways depending on the situation. I think that is the mark of a good capital allocator. One that just goes one way all the time might not be a good thing (companies repurchasing shares regardless of price etc...).

      Delete
    2. Thanks for the reply. I know Teledyne from having studied Singleton and from having read Outsider recently. These articles and books suggest that Singleton only issued shares when he knew the stock was trading at a high multiple, which obviously makes sense from a master cap allocator perspective. I don't have the info to check, but I wonder what happened to TDY shares when he did issue those shares for acquisitions -- did the stock fall subsequently until the street saw the earnings come through in the combined company? The reason why I ask is because I wonder if there might be a better opportunity down the road to pick up shares, after they have corrected due to the equity issuance (if it corrects at all). Frankly, POST has not done a good job so far explaining why they have chosen to use converts and issue equity to finance their M&A growth.

      By the way, I saw the latest Nielsen data as of Feb 2014 and volumes for RTE cereal have been down in the last 52 weeks (in terms of % change). It is becoming "less" negative, but the negative YoY change still is concerning about whether cereal is in structural decline, which would be detrimental to a long thesis given the run rate of debt that management has in mind (5x ND/EBITDA). I also read the Kellogg and General Mills transcripts for the last 2 years and in the most recent quarters, they are adamant that cereal is not in structural decline, saying that in the last decade the category has been under-advertised. I would love to take their word for it, but how often do we see management teams not recognize secular decline when it is in front of them? It can sometimes be a case of standing too close to the tree. I would love to believe them though the data so far says otherwise. On the latest guidance call (March 2014), the POST guys say something similar -- RTE cereal should pick up in 2015 -- I guess they are thinking that once K and Gen Mills puts money in advertising then POST will also benefit... It is very hard to come to any conclusion on whether cereal is in decline for a bunch of reasons and I guess only time will tell -- that is, after the two big cereal players invest in advertising and seeing whether volume responds.

      At this point, given the big worries I have (i.e. is cereal in decline? what's up with the massive dilution?), investing in POST seems like just betting on Stiritz pulling a Ralston 2.0. In other words, there's no business analysis possible here. There's no possibility of conservatively estimating what owners earnings will be down the road because it's all contingent on acquisitions. There's no margin of safety at this point. If I were to play devil's advocate and ask if I would short this stock from these levels, I would also hesitate simply because of the Stiritz factor...

      Delete
    3. Hi,

      You raise good points. I don't have detailed stock price data for Teledyne so I don't know. I too don't know how cereal will work out going forward.

      As for issuing shares and converts, interest rates are currently very low and the stock market has been very strong, so just on that, it seems to make sense to me so I don't have a problem with it, especially since the money raised will be invested by someone who does it well; I would hate it if it was your typical CEO that didn't have a record of good investing.

      And yes, you can't really analyze POST like a normal company as it is in the build-out mode so it is a Stiritz play.

      We'll see how it goes.

      Thanks for reading.

      Delete
  17. Post at $37.42 market close August 8, 2014. What are your thoughts on its valuation now.

    EV of $5,130, including net debt of $~3,500.
    Management forecasted F2014 adjusted EBITDA of $260-$270, or $265, take out capex of $70, and we are left with EBIT of $195, trading at 26.3x today, much higher than in November due to the recent offerings...

    Also, did a very high level sum of the parts analysis:

    Just Post Foods divisional quarter ended June 30, 2014 EBITDA of $61.2 annualized, at 8-10x (recommended by bankers at spinoff from Ralston) leads to EBITDA = $1,960 to $2,450, or $2,200
    +American Blanching $128 acquisition cost
    +Michael Foods at $2,450 acquisition cost
    +PNC at $180 acquisition cost
    + Attune, assumed $20 (cost undisclosed), since had only $16 of revenues when acquired
    + Hearthside at $158 acquisition cost
    + they own some real estate, distribution centres, manufacturing facilities, etc. (on books at $389, so say $500 market value)
    + all other brands, intangibles, etc. $900 on books
    - goodwill impairment of $3

    So, we end up with a net value of ~$6,500. Take out net debt of $3,500, and our equity value of ~$3,000 by 44 shares os translates to a price of $68, which is what Stiritz paid for the businesses. And you get future growth for free so I see this stock hitting $70-100 within the next 2-3 years.

    Thoughts?

    Vik
    -Toronto, Canada

    ReplyDelete
    Replies
    1. Hi,

      Thanks for the analysis. As for the whole valuation, you are missing a major piece of the EBITDA. The EBITDA guidance for 2014 of $260 - $270 million excludes Michaels foods while the $5.1 billion EV includes the entire amount of Michaels Foods. So POST is not at all as expensive as your analysis.

      They expect Michaels Foods to generate $75 - $80 million in EBITDA for 2014, but that only includes 4 months (since the deal just closed in June). So to compare it to the $5.1 billion EV, you can take the $260 million guidance ex-Michaels and then add back maybe $75 million x 4 to annualize it and get a $225 million figure. That gives you a total run-rate EBITDA of $485 million. (actually, this may be low if some acqusitions included in the $260 million guidance doesn't include a full year; in that case the 2015 EBITDA goes up just on that).

      So the EV/EBITDA is more like 10.5x.

      I think this is one of the big confusions with POST. I've seen really high debt/EBITDA and EV/EBITDA valuations and the error is due to the above; include full amount of debt from an acquisition in the EV and then not include a run rate EBITDA...

      As for your sum of the parts, it looks interesting, but some of the other assets might be double counting as they are probably part of the other businesses that you already calculated, unless you know they are excess assets not utilized (and therefore sellable) by the other businesses you have already included in the valuation.

      Anyway, POST is still interesting to me. I haven't given up on it yet!

      Delete
  18. Hi kk, two questions-

    1) Yes it seems like only partial year of Dakota, Golden Boy, and Dymatize is included in the $260-270mn - do you know what their full-year contribution would be?

    2) In 6 months' time, they cut twice and the guidance went from $315-340mn to $260-270mn. This is despite the LTM 2013 pro forma EBITDA of $346mn that they provided.

    So the question is - why is a supposedly stable business seemingly deteriorating so much, and how much one can trust the $260-270mn figure? It seems that it's never been a valuation issue. It's just earnings kept falling.

    Appreciate any thoughts you may have...









    ReplyDelete
    Replies
    1. Hi,

      I don't have those figures handy at the moment; I'll see if I can find them early next week (going on soon).
      POST may not have been a valuation issue, but I have seen analysis that are just plain wrong so it must be a factor somewhere.

      But the deterioration is real for sure. They explained this quarter's miss in the release. The question is whether these are short-term hiccups, or whether they bought 'lemons'. We shall see. POST insists these are short term issues that will be resolved soon.

      It's possible, of course, (as some claim) that some of us are a little drunk on the outsider kool-aid. I hope not but we'll see.

      Thanks for reading.

      Delete
    2. oops, I meant I'll be going out soon so won't have much time until Monday...

      Delete
  19. Thanks! Also, any rough idea how the pending acquisitions of PowerBar etc may affect the EV/EBITDA number?

    ReplyDelete
  20. In the previous Q2 earnings release, it gives a pro-forma adjusted EBITDA for 12 month period ending Mar 31, 2014 of 570 million. http://finance.yahoo.com/news/post-holdings-reports-results-second-212900058.html It is in one of the tables at the bottom. The figure includes all the acquisitions including Michael's Food. So using the 570m to calculate EV?EBITDA multiple: 5.1 - 5.2b of EV/570m is 9.1X. The recently announced acquisition of ABC is priced at 8.5x of EBITDA. It is small but should be accretive (lowering) to the EV/EBITDA multiple.

    ReplyDelete
  21. If the qualitative reasoning for investing in POST is Bill Stiritz then wouldn't it be easier to do as follows:

    1. When Stiritiz buys its equity then we buy.
    2. When Stiritiz sells its equity, we sell.

    This is actually what I have done when I saw he diluted. After all, we are basically stating that this person ha far superior capital allocation skills than we do so who are we to guess him? I'll be back in when I see him do buybacks. Thank you for the idea and following up on it.

    ReplyDelete
    Replies
    1. Good point. If Stiritz dumps HLF and buys POST, I guess we will have to back up the truck.

      Delete
  22. It's just two quarters of weak performance. Nothing to get scared about. Stock price volatility is par for the course given the high leverage. From what I tell, the original thesis still holds - great management team with good capital allocation leveraging up to buy quality assets.

    ReplyDelete
  23. There's a great article on SA about Stiritz's involvement in HLF. http://seekingalpha.com/article/2413685-is-corporate-governance-reform-at-post-overdue

    Key take away is that his investment in HLF is orders of magnitude higher than his equity exposure to POST. This is the part I was always uncomfortable with in POST.

    ReplyDelete
    Replies
    1. Hi,

      Yes, it would be better if Stiritz owned a ton of POST stock instead of HLF. I knew that from the beginning. But I don't worry about what is written in the article. First of all, HLF to Stiritz is a special situation. He saw it as Ackman bullying a company down and the stock got really cheap so he backed up the truck thinking Ackman is wrong.

      As far as HLF being a competitor, they operate a totally different business model with a totally different and non-overlapping distribution network so I don't see a conflict there at all.

      I do think Stiritz really wants POST to succeed; he's not abandoning it for HLF.

      Thanks for posting (no pun intended).

      Delete
  24. Stiritz out, thesis still intact ?

    ReplyDelete
    Replies
    1. Hi,
      Any time you have unexpected management changes, that's usually not so good. But frankly, this change may be more of something to reflect reality; Stiritz seemed more like an executive chairman (overseeing acquisitions) rather than a hands on CEO diving into the details. So in that sense, maybe this is better.

      But we'll have to see. I still like the idea, but am sort of surprised at the continued weakness in consumer demand overall...

      Delete
  25. Axis Bank sells 20 lakh shares of NSDL at Rs825 each for Rs165cr.
    Share Market Company

    ReplyDelete