It's a new year and this is the time that we all can't wait for the full year results to be announced to update our thoughts on various companies. And of course, my favorite time of year is when all the annual reports start coming out.
Anyway, one recent idea that I really like, Post Holdings (POST) did come out with their annual report in December as their year ended in September 2013.
It's a well-written annual report by the outsider CEO, Bill Stiritz. He explains his plan for POST going forward. Here are some snips:
This is a quote in the beginning of the report from Shakespeare's Julius Caesar:
There is a tide in the affairs of men, which taken at the flood, leads on to fortune. Omitted, all the voyage of their life is bound in shallows and in miseries. On such a full sea are we now afloat. And we must take the current when it serves, or lose our ventures.This points to the opportunity Stiritz sees for POST. One of those areas is organic food.
Sales of organic food in the U.S. has grown around 18%/year since 1990 according to this figure (to the right). That's a pretty big tide. I've always been a fan of companies like Trader Joe's and Whole Foods and do feel that this trend will continue for some time. The opening of Whole Foods and Trader Joe's in a neighborhood tends to increase demand for organic foods overall even at the crappy local supermarket. In the neighborhood where I live this has happened too. Once a Fairways, Trader Joe's and Whole Foods opens, the local supermarket chain seems to increase shelf space for organics and higher quality foods to try to hold on to their customers.
So getting into the organic food business is sort of like selling pans and shovels in a gold rush Samuel Brannan-like. The big chains, local chains, mom and pops, convenience stores will all fight each other for market share, but it will increase the demand overall for organics as the crappier stores try to improve their product lineup.
Anyway, that's just my pedestrian observation. I am seeing it happen around here and other neighborhoods.
Here is Stiritz explaining the concept of Post Holdings as a holding company:
Unlike other companies that do acquisitions to build empires, Stiritz will focus on "strategic portfolio management". I think some companies focus on synergies as that's one way (or the only way) to justify their empire-building. Stiritz is clearly focused on strategic portfolio management to create shareholder value.
It is relatively unique for a company to be this hybrid, public company/private equity fund entity. But it's not completely unique. This blog likes to focus on companies like that.
The other difference between POST and a private equity fund is that POST is investing with permanent capital whereas private equity funds have an exit date in mind when they enter a purchase transaction; at some point there needs to be a liquidity event to return capital to fund investors upon expiration of the fund. POST doesn't have that problem (similar to Berkshire Hathaway and other Berkalikes).
So if you just look at the headline valuation measures, POST looks a little expensive. For example, the EV/EBITDA on a trailing twelve month basis is 12.9x according to Yahoo Finance. That's not cheap. Well, General Mills is trading at 11x and Kellogg at 13x, so it's not totally out of whack for a 'cereal' company.
But this 12.9x EV/EBITDA is not reflective of the true value because POST did some acquistions last year boosting EV but the EBITDA hasn't kicked in for the full year.
POST expects adjusted EBITDA for the fiscal year 2014 to be in the range of $245-260 million. Against the current EV of $2.6 billion, that's an EV/EBITDA of 10-10.6x. The $245-260 million outlook includes only acquisitions completed through September 2013, and the EV reflects the September 2013 balance sheet (and current stock price at around $51/share). There has been a $525 million senior debt offering and $300 million convertible preferred stock offering since then, and the Dakota Growers acquisition that just closed.
Dakota Growers was bought for $300 million and is expected to add $42-46 million in EBITDA on a full year basis.
Either way, the 10-10.6x range looks within the range of other cereal companies. Yes, of course, you notice that I am comparing trailing twelve month for comps versus forecast, forward EBITDA for POST. But given that this industry doesn't grow much, it should be close enough.
But of course, this is not just another cereal company as we know. This is an outsider CEO company! If you don't know what I'm talking about, here is the link to the outsider CEOs post. And here is my original POST post.
I don't really look at food companies on a book value basis. Or at least not directly in valuation. We all do to the extent that we look at return on equity, which of course, is based on book value.
But in this case, book value seems to provide a valuation data point. Much of POST's book value is in goodwill, and this goodwill was created by Ralcorp's purchase of POST back in August 2008, so it's a recent figure. Also, the goodwill is tested for impairment every year.
But still, these management estimates are not to be taken too seriously even if the CEO is Stiritz. These 'models' (discount cash flow etc...) can be flakey, but at least it can be a datapoint.
Book value per share of POST as of September 2013 was $45.83, so POST is trading at around 1.1x BPS.
Here is the cut and paste of the goodwill valuation from the POST 10-K. Again, I wouldn't lean on this valuation too hard, but it is a datapoint:
Goodwill - Goodwill represents the excess of the cost of acquired businesses over the fair market value of their identifiable net assets. In the fourth quarter of fiscal 2011, we adopted ASU No. 2011-8 “Intangibles — Goodwill and Other (Topic 350): Testing Goodwill for Impairment.” We conduct a goodwill impairment qualitative assessment during the fourth quarter of each fiscal year following the annual forecasting process, or more frequently if facts and circumstances indicate that goodwill may be impaired. The goodwill impairment qualitative assessment requires us to perform an assessment to determine if it is more likely than not that the fair value of the business is less than its carrying amount. The qualitative assessment considers various factors, including the macroeconomic environment, industry and market specific conditions, financial performance, cost impacts, and issues or events specific to the business. If adverse qualitative trends are identified that could negatively impact the fair value of the business, we perform a “step one” goodwill impairment test. For fiscal 2013, we determined that our recent history of goodwill impairment combined with limited fair value excesses in prior valuations were significant qualitative factors which required us to complete the “step one” goodwill impairment test for our Post Foods reporting unit. We also concluded that “step one” goodwill impairment tests were warranted for our Attune Foods and Active Nutrition reporting units because of the recency of acquisition of those reporting units during the current fiscal year. The “step one” goodwill impairment test requires us to estimate the fair value of our reporting units and certain assets and liabilities. The estimated fair values were determined using a combined income and market approach with a greater weighting on the income approach (75% of the calculation for Post Foods and Attune Foods and 100% of the calculation for Active Nutrition). The income approach is based on discounted future cash flows and requires significant assumptions, including estimates regarding future revenue, profitability, and capital requirements. The market approach (25% of the calculation for Post Foods and Attune Foods and 0% for Active Nutrition) is based on a market multiple (revenue and EBITDA which stands for earnings before interest, income taxes, depreciation, and amortization) and requires an estimate of appropriate multiples based on market data.
As of September 30, 2013, we had goodwill balances of $1,366.3 million, $75.1 million and $48.3 million in our Post Foods, Attune Foods and Active Nutrition reporting units, respectively. For the calculation of fair value of our reporting units, we used the following key assumptions:
Future revenue growth
2.4% - 9.0%
3.0% - 4.5%
2.9% - 20.5%
Terminal revenue growth rate
EBITDA multiple for market approach:
Revenue multiple for market approach:
Revenue growth assumptions (along with profitability and cash flow assumptions) were based on historical trends for the reporting units and management's expectations for future growth. The discount rates were based on a weighted average cost of capital utilizing industry market data of businesses similar to the reporting units. For the market approach, we used estimated EBITDA and revenue multiples as listed in the table above for Post Foods and Attune Foods based on industry market data. For the Active Nutrition reporting unit, we did not use the market approach because we concluded that the selected industry market data was not consistent with a business with the near term growth expectations of the Active Nutrition reporting unit. An unfavorable change in forecasted operating results and cash flows, an increase in discount rates based on changes in cost of capital (interest rates, etc.), or a decline in industry market EBITDA and revenue multiples for any of our reporting units may reduce the estimated reporting unit fair value below carrying value and would possibly result in the recognition of a goodwill impairment loss. The table below provides sensitivities for certain key variables in our goodwill impairment analysis for each of our reporting units. In all cases, the table presents the amount of change in each respective variable, holding all other variables constant, that would have resulted in an indication of potential impairment for the respective reporting unit. Changes equal to or greater than the amounts reflected in the table would have resulted in a failure of step one of the test and would have resulted in a step two analysis to determine the amount of any impairment.
Revenue growth rate
The above doesn't mean that the goodwill is worth the balance sheet value. But it does mean that it's within range where an impairment wouldn't have to be taken. For example, an EBITDA multiple change of 1.75x is pretty big versus a 10x base; that would be an almost 20% valuation change.
But it also means that goodwill is not totally worthless.
Precedent Transactions Analysis Valuation
And it occured to me that Ralcorp was purchased by Conagra right after POST was spun off, and I would hate to see the hard and expensive work of investment bankers putting together the deal go to waste so I decided to recycle their work here.
There really is no 'comp' for POST, but it's a food company and so was Ralcorp. There often isn't a perfect fit for comparing valuations, but it doesn't hurt to take a look at what food company deal valuations have been like in the recent past.
This is from the December 2012 merger proxy, so it's pretty 'fresh'. Here's what the bankers dug up:
Selected Precedent Transactions Analysis.
Ralcorp’s financial advisors analyzed certain publicly available information relating to transactions in the packaged food industry since 2006. Specifically, Ralcorp’s financial advisors reviewed the following transactions:
Selected Branded Food Transactions
|Campbell Soup Company||Wm. Bolthouse Farms Inc.||July 2012|
|Kellogg Company||Pringles (Procter & Gamble Co.)||February 2012|
KKR & Co. L.P., Vestar Capital Partners, Centerview Partners
|Del Monte Foods Company||November 2010|
|Grupo Bimbo S.A.B. de C.V.|
Sara Lee Corp.’s North American Fresh Bakery Business
|The Carlyle Group L.P.||NBTY, Inc.||July 2010|
|Nestlé S.A.||Kraft Foods Inc.’s Frozen-Pizza Business||January 2010|
|Pinnacle Foods Group LLC||Birds Eye Foods LLC||November 2009|
|Grupo Bimbo S.A.B. de C.V.|
George Weston Limited’s Northwestern U.S. Bakery Business
|SOS Corporacion Alimentaria S.A.||Bertolli (Unilever Plc)||July 2008|
|The J.M. Smucker Company||Folgers (Procter & Gamble Co.)||June 2008|
|Ralcorp||Post Cereals (Kraft Foods Inc.)||November 2007|
|The Blackstone Group L.P.||Pinnacle Foods Group Inc.||February 2007|
Selected Private Label / Food Service Transactions
|The J.M. Smucker Company|
Sara Lee Corp.’s North American Foodservice Coffee and Beverage Business
Sara Lee Corp.’s North American Refrigerated Dough Business
|Lassonde Industries Inc.||Clement Pappas and Company, Inc.||June 2011|
|TreeHouse Foods, Inc.||S.T. Specialty Foods, Inc.||September 2010|
|Cott Corporation||Cliffstar Corporation||July 2010|
|Aryzta AG||Fresh Start Bakeries (FSB Global Holdings, Inc.)||June 2010|
|Ralcorp||American Italian Pasta Company||June 2010|
|GS Capital Partners||Michael Foods, Inc.||May 2010|
|Viterra Inc.||Dakota Growers Pasta Company, Inc.||March 2010|
|CSM N.V.||Best Brands Corp.||February 2010|
|TreeHouse Foods, Inc.||Sturm Foods, Inc.||December 2009|
|IAWS Group, plc||Otis Spunkmeyer, Inc.||October 2006|
While none of the companies that participated in the selected transactions is directly comparable to Ralcorp and none of the transactions in the selected transactions analysis is directly comparable to the merger, Ralcorp’s financial advisors selected these transactions because each of the target companies in the selected transactions was involved in the packaged food industry and, based on their professional experience and judgment, had operating characteristics and products that for purposes of analysis may be considered similar to certain operating characteristics and products of Ralcorp.
For each of the selected transactions, Ralcorp’s financial advisors calculated and compared the enterprise value of the target company, calculated based on the purchase price paid in the transaction as a multiple of EBITDA of the target company for the latest twelve month (which we refer to as LTM) period ended prior to the announcement of the merger. In addition, Ralcorp’s financial advisors calculated this multiple for Ralcorp based on the value of the merger consideration and using the LTM EBITDA as of September 30, 2012. The following table presents the results of this analysis:
Enterprise Value as a Multiple of:
|Private Label /|
|Private Label /|
LTM EBITDA (1)
EBITDA multiples for Wm. Bolthouse Farms Inc., Pringles (Procter & Gamble Co.), Kraft Foods Inc.’s Frozen-Pizza Business, Sara Lee Corp.’s North American Refrigerated Dough Business and Cliffstar Corporation excluded value paid for step ups in tax basis.
Because of the inherent differences between Ralcorp and the parties to the selected transactions, Ralcorp’s financial advisors considered differences between the business, financial and operating characteristics and prospects of Ralcorp and the parties to the selected transactions that could affect the values of each. Based on their judgments and experience, informed by the transaction multiples of these selected transactions, Ralcorp’s financial advisors selected a reference range of 8.0x to 10.0x and applied this range to the LTM EBITDA of Ralcorp, resulting in illustrative per share values for Ralcorp common stock ranging from $50.42 to $69.72.
So the bankers figured Ralcorp was worth between 8-10x EV/EBITDA. From this (and the above table), it seems like POST is a little on the high side of valuation. But again, POST is not just any old cereal or food company.
This is not one of those situations where I can say POST is worth this, and it's trading at some discount to that. It's more like, it's trading at what others are trading at and in a reasonable range, but forward returns may not be so reasonable given the history of the current CEO.
Stanley Druckenmiller in a TV interview said that Stiritz is the greatest capital allocator of all time. I think he based this on his study of insider purchase of shares; he had the best timing by far of anyone in the universe they looked at. Druckenmiller is so impressed with Stiritz as a capital allocator that he bought shares in Herbalife (HLF) without much knowledge of the HLF business. He said that when someone so good at capital allocation puts so much of his own net worth into a stock, you don't really need to know all that much about the stock.
I know many people don't think very highly of hedge fund managers, but I have always respected Stanley Druckenmiller, no less than many other of my investment 'heroes'. His style is a little different than what I have become interested in. And I don't always agree with what he says (well, I don't always agree with what Munger and Buffett say either). But he is the real deal. All the criticism about hedge funds that I hear doesn't apply to Druckenmiller. He is truly different.
Anyway, back to POST. I do sort of wish Stiritiz owned a lot more POST stock; that would really make this a perfect story. Oh, and if Stiritz was a little younger too. He is 79. That's the one 'hole' in this story. But hey, let's put it this way. Looking at Munger, Buffett, Icahn, Soros etc... maybe 80 is the new 50.
Otherwise, as I said before, it's a great story:
- It's a perfect Greenblatt-type spin-off; a neglected business spun off with renewed focus and incentivized management to turn the business around (in this case, goal is to stabilize legacy business enough to use as a base to expand into new areas).
- It's run not by an outsider-like CEO, but an actual outsider CEO featured in the great book.
- The company is getting into new areas with growth potential; not only industry growth potential (organics, private label), but potential for consolidation (roll-ups). I've always loved Trader Joe's, but unfortunately you can't buy the stock. And Whole Foods is too expensive (I'm talking about the stock price, but I know what you all are thinking). Here is a way to get into the trend at a reasonable price. Private label is also very interesting (Trader Joe's is basically a private label. Costco's Kirkland is also very interesting. This is a big trend that will continue for some time. Actually, Costco's Kirkland may be interesting for COST but maybe that will be another post for another day).
- It is reasonably priced. There is no "outsider CEO" premium. The headline EV/EBITDA figure (of close to 13x) is misleading due to one-time reasons. When the EBITDA from 2013 acquisitions begin to flow through, the valuation will look cheaper. I know this sounds silly, but the market does often act like this (maybe due to a lot of robots trading off of unadjusted, nominal valuation figures not to mention value investor screens not showing adjusted valuations. A great example of this 'silliness' is Pzena Investments; when the lousy performance figures of the financial crisis drops off in the five year returns, the performance metrics look better, investor demand rises and the stock goes through the roof. Pzena said he understands this makes no sense, but assured us that this is how the markets work. When things 'look' better, people think it's better.)
So anyway, this is a lazy, light post, but I wanted to put something out there. And even though there isn't much 'meat' in this post, I really do like POST.
And I do want to keep posting more but I want to resist the temptation of just posting for the sake of posting. I would rather have a long gap of no posts than have the blog filled with nonsense, like a bunch of rants about one thing or another (who can't write pages and pages of that every day?!).
I very much look forward to each of your posts.ReplyDelete
However, I don't quite see why POST going "organic" is such a big deal.
Aren't all food/cereal companies going on the organic/non-GMO/biodynamic bandwagon?
Then, isn't GIS a better deal and a little in front with their Cheerios already going non-GMO (and a 3% dividend!)
I'm not pumping nor I have any stock in GIS
Is it really all about the CEO?
Yes, first of all, it is all about the CEO and the special 'situation' (recent spinoff ). Going organic is not the main part of this story. But it is good that they are planning roll-ups/consolidation in a growth area which organic certainly is.
And yes, the rest of the industry including the major food companies are going organic. But a lot of what's going on with other food giants feels like they are more replacing their old products with new, healthier products and not necessarily growing in new markets. This may be true when they acquire organic 'brands', though, like Kashi. But if Frosted Flakes comes out with an organic Frosted Flakes, I think that sort of just replaces the old FF.
Of course roll-ups and consolidation can be done profitably in non-growing markets or shrinking markets, but if there is opportunity, why not go for the growing market? This is what Stiritz sees, and he is not going to overpay for some fad company...
So it's a combination of all the stuff I said in my post, but yes, organic is not the main story here for sure. But to me, it's still an interesting part of it.
thanks for reading.
"organic Frosted Flakes" is hilarious
like "gluten-free water" (real product)
after reading OUTSIDERS (and passing on to many friends) I think I understand where you are coming from
FWIW - I notice that Message Boards of the stocks you post typically are very quiet. that's very good and very outsider
thanks again for your work
Do you have an opinion on the proposed SIRI acquisition of the remaining 47% by Liberty Media? Not much of a premium, but shareholders get stock from another outsider CEO. Malone and his luietenants know how to allocate capital. It's an interesting situation.ReplyDelete
Yeah, I read the transcript of the call and it certainly makes sense from LMCA's point of view; they get full access to the free cash flow instead of having to engineer SIRI buybacks and LMCA sales. So that's a good thing. They said the tax asset is not a big factor in the deal as they fully expect that to be absorbed at the SIRI level (so no need to get tax asset to offset other gains at LMCA).
The interesting thing, though, is capital efficiency (well, I guess this amounts to the same thing I already said; access to free cash). As a combined entity, they can lever up more so in that sense there is value that can be gained from a combination (of course, finance professors will argue that there really is no gain as something is given up with the increased leverage).
LMCA's argument to SIRI's shareholders makes sense too, but I have no idea how they would feel. If I owned SIRI, I would be OK with the deal as I don't give up any upside. If it was a cash deal, of course a much higher premium would be needed, but since you get the upside in the Liberty class C stock going forward, I would think it's OK, unless someone thinks SIRI has much more upside than Liberty in which case the deal would be upside dilutive, in a sense (as you go from owning pure SIRI to owning it through the Liberty parent which has other assets).
I was wondering about all of this stuff so from an LMC shareholder point of view, this would be great.
We'll see how it goes.
I own both LMCA and SIRI, with much more LMCA than SIRI. Wearing my Siri's hat, I will not vote at the current terms. For a company that grows FCF at least mid-teens for the next few years, and I expect about $0.175 to $0.18 fcf in 2014, so selling at $3.68 less than 21x fcf. It isn't that attractive. Moreover, LMCA's stock has since deteriorated. The offer is pegged to 0.0253 shares of LMCA for every Siri's share. So at current price $137, Siri is valued at $3.466, much less than the headline $3.68 when the offer was announced.Delete
By the way, thank you for your posting on POST. I also happen to own POST which I accumulated from Sep to Oct last year when it was $39 to $42. I totally agree with your analysis. In fact, including the other two latest pending acquisitions - golden boy and dymatize - ebitda comes to roughly about $360m. But of course, I suppose more funds gotta be raised either thru debt or equity or preferred.Delete
Is the $245-260 million figure from the 2013 Annual Report?ReplyDelete
The 2014 guidance is from the Q4 earnings release. You can get it at their website.Delete
Thanks for reading.
A cursory look at the annual report shows that the combined earnings from Attune and Premier Nutrition is around 3.5 million USD for 2013, and POST paid around 350 million USD for both companies, paying around 100x 2013 earnings. Isn't this quite expensive? Would you say it's justified, despite the high forecasted growth rates?ReplyDelete
Those figures aren't for the full year so you would have to account for that.
Thanks for reading.
Those figures are for the year ended September 2013. Besides, even if 3.5 million was the figure for the first 3 quarters of 2013, 100x 75% of 2013 earnings is still expensive.Delete
Thanks for your posts, I find your ideas very interesting. However, as you surely know, and Stiritz would agree, mindless acquisitions is a sure way to destroy shareholder value, and Stiritz's historical record is indeed phenomenal, but I just don't see how paying 100x earnings for 2 consumer product companies which will contribute to around 2% of POST's 2013 net earnings can be justified.
Yes, they are figures for the year ended September 2013. But they only completed the acquisition of Premiere Nutrition in September 2013, so there is probably not even a months worth of data in there. Also, Attune Foods is mostly Hearthside. They bought Attune for $9 million in December 2012 and bought Hearthside for $160 million on May 28, 2013. So even there, there is only four months worth of data.Delete
Even with that, though, I don't know if you want to just annualize it as there are acquisition related expenses that may need to be accounted for (to normalize earnings).
Thanks for reading.
By the way, if you look back at the press releases about these acquisitions, they tell you what they expect to earn on a full year basis. They paid $158 million for Hearthside and they expect EBITDA of $17-19 million on a fully year basis so that's 8.8x EV/EBITDA. They paid $180 million for Premier and that is expected to add $17-20 million in EBITDA, so that's 9.7x EV/EBITDA.Delete
Ok got it. Thanks for the clarification.Delete
Thank you for your insights on POST. What I don't understand is how the shares can be viewed as not expensive if considering the P/E ratio. If POST earns $1.25 next year, that's a forward P/E of about 40. With the US market near a P/E of 16 or so, why isn't POST with a P/E near 40 considered very expensive? Or does the P/E ratio for some reason not apply to POST? Thank you for any thoughts you are able to provide on this. - WildaReplyDelete
Yes, that sounds expensive. But in these leveraged types of situations, people do tend to look at EV/EBITDA and things like that instead of P/E. The P/E can change dramatically according to capital structure, interest rates etc... so doesn't often really reflect the value of an entity. For example, if a company had operating earnings of $10 and interest expense of $10 per year, the business might be valued at zero since it makes no money. But if someone was to come in and buy the whole entity including paying back debt, they can make $10 per year as the $10 interest expense goes away. So the value of the business is not zero.
This is why Joel Greenblatt uses EBIT/EV for earnings yield in the magic formula; you want to know what the cash on cash return is if you bought the business outright (including paying back the debt). You can read about it in his great book, "The Little Book That Beats the Market".
Thanks for reading.
So interest expense doesn't matter for you?Delete
Well, it depends. If an old cyclical company has a lot of interest expense and can barely cover it with operating earnings, that may be no good. It can still have value, though. But for 'dynamic' companies like POST, and some Malone entities, for example, I don't worry about it too much as they use debt for value enhancing acquistions and this can be paid down with free cash flow as needed. For these guys that are very good at using debt for acquisitions, I don't worry too much because this is what they do.Delete
Hey guys, just saying, if you ever need like investing software and stuff like that, be sure to check out my blog! http://the-investing-folio.blogspot.com/ReplyDelete
<< FOFI: Hedge Funds at a Discount?ReplyDelete
I am not a big fan of closed end funds, but if something is trading at a steep discount, we have to take a look. In general, a lot of funds have expense ratios in the 1%-2% range, sometimes higher. So in my mind, they deserve to trade at a discount to net asset value (NAV).
I use a simple 10% for my discount rate for most things, and this 'expense' to me is worth 10%-20% of NAV (2% expense ratio / 1% = 20%).>>
Hi, I'm looking at FOFI and found your old post. Would you be kind enough to explain the last sentence of the extract I've quoted above ...
That may be a typo, a 2% expense ratio would be worth 20% discount because 2%/10% = 20%. Let's say you own a no cost index fund, and another one exactly like it charges 2% in fees/expenses. Obviously, the second fund would be less attractive than the first as you will get 2% less per year because of the expense. To compensate for that, using a 10% discount rate would give you 20%. So you would need to pay at least a 20% discount on the second fund versus the first.Delete
Of course, if the fund routinely beats the S&P 500 index by a wide margin, then I wouldn't care that much about the 2%. As long as the fund outperformed whatever benchmark after fees, then it's OK. If it doesn't, then it's not OK. Most closed end funds do NOT outperform anything at all and they have these high expenses. So for the most part, they deserve a big discount.
Thanks. So are you saying that you will buy closed-end funds at a 10% discount to NAV because you do not believe that a closed-end fund structure offers the stated NAV to a buyer? And are you further saying that an ongoing 2% fee exposure causes you to require a 20% discount?Delete
I can accept these as rules of thumb, but I can’t see the math ... Bill
The math is simple. If a business or entity earns $10 per year and your discount rate is 10%, then that business is worth $100 to you. And then lets further say that there is a manager of the business that acts like a fund manager and takes $2/year in fees from the business every year. This business is no longer worth $100 to you, right? Because instead of $10 per year, you will now only make $8/year. With a 10% discount rate, the business is now worth to you $80 instead of $100.Delete
The math is similar with the fund. If someone is going to take 2% per year out of a fund that doesn't consistently outperform a low cost or no cost index, then that fund is worthy of a big discount as far as I'm concerned. With a 10% discount rate, the 2%/year fee, or you can call it a penalty if you want, will be worth around 20% of the fund assets (2% divided by 10%, just like in the example above).
Greatly appreciate if you would post your latest take on FRMO.
It hasn't been too much time since my original post. The figures are updated, I suppose, but my thoughts haven't changed too much. It looks very interesting and I like what I see, but I'm not too comfortable now with the valuation level. I think we will learn more on the conference call coming up soon. They have great transcripts of earnings conference calls and annual meetings at the website so I look forward to reading those. I don't own FRMO at this point (because of valuation), but will keep following it. If I have any new thoughts, I will make a post. Thanks for reading.
Looks like POST is doing really well. They just guided for $260-284 million in ebitda for the remainder of the year, which would be 58-73% growth over last year's ebitda of $164 million.ReplyDelete
*$164 million over the last three quartersDelete
KK, I'm gonna go ahead and assume this change in guidance really has no effect on your long-term stiritz-driven thesis. But any new thoughts by any chance?ReplyDelete
Yes, you are right. It doesn't change my view at all; I don't worry about short term outlook too much. POST has run up a bit so no surprise on the pullback. I assume the capital raise is an offensive one too, which should be good.Delete
I've really enjoyed your blog, which I only recently discovered as I was doing some research on POST as an investment.
Could I just ask your view on the recent equity raise? The market obviously seems to hate it, along with the reduced guidance (-8%). Does this make any sense given Stiritz's past track record on capital allocation? Any idea why he would have done this vs pursue some other form of debt financing?
Lastly, any view on where management can take steady state gross margins?
Keep up the great work.
I haven't put too much thought to it yet (I am slow) but I wouldn't worry about it. Outsider CEO's tend to do these things opportunistically. The stock price has run up recently so maybe Stiritz saw a chance to take advantage of that. That's very outsider-like so it's good. As for guidance, it's not much and there are a lot of moving parts so not such a big deal to me. As for the stock price reaction, again, the stock has run up a bit so not surprising. I have no view, really, on gross margins until we see some steady results come through the books (due to the recent acquisitions).
One of his first actions as CEO was to repurchase stock still held by Ralcorp after the spin off. The price was near $30 I think. So, if he buys back stock when its cheap and sells it when he feels likes it is getting ahead of itself, especially if it is an "offensive" move like you suggested....that is a very "outsider-like" move, and one that should not overly concern shareholders. Like you mentioned above, the company looks expensive based on traditional backwards looking metrics because they have raised a lot of capital (debt, preferred stock) and are currently paying the price (interest, preferred dividends) but the full benefits of the acquisitions are not flowing through the income statement yet. When you adjust for this (like you have done) the stock does not look as expensive. A bet on Post basically means paying a "fair" price for a company today that is run by one of the great value creators (literally) in recent decades. Seems like a reasonable investment to me.ReplyDelete
I thought I post an update given the latest developments. Including all aquisitions the company should have around $4bn in sales (in MM Post: 980, Attune: 88, Active Nutrition incl Premier, Dymatize, Power Bar and Musashi 468, Private Brands incl Dakota and Golden Boy 490).
2015 Ebitda should be around 600MM.
EVin MM (prior to planned equity issuance of 630MM) : LT debt of 4407 plus market cap 1848 (share count 38.5M, stock price $48) minus cash 340 = 5915
EV/Ebitda (2015e): 9.86x - still pretty close to your prior estimate and fairly reasonable given the growth potential in the new categories.
This is just an approximation given all the moving parts. The latest quarterly report showed some weakness in traditional cereals despite share gains of HBO and also some fixable issues at Dakota and Dymatize but the overall direction looks very good. The latest acquisition is a bit out of prior pattern in terms of size but it places them right in the latest food trends of less carb and more protein. During the conf call for the Michaels acquisition Stiriz said that despite the size of the transaction and the resulting balance sheet expansion, it won't slow them down a second if they see other opportunities to expand either active nutrition or private brands.
The stock price has come back due to expected equity issuance and 1Q weakness in cereals and dakota. Also, I think that the price finding process with all those moving parts is quite difficult and should keep the stock rather volatile. But it think if one can look through that it looks like a good investment to me.
Thanks for the update. Yes, I think it's still interesting. I don't worry too much about quarter to quarter. The cereal business is disappointing, but it is becoming less and less important but we still want stability/growth there for their cash flow.Delete
I don't think the picture changes that much, and yes, the stock price will be volatile; it ran up quite a bit recently, so a correction is not totally unexpected.
I am somewhat bearish on Post for the following reasons:ReplyDelete
1. Is it possible that we have bought into the hype following "The Outsiders". If it were not for that book, would the price of POST not be lower, reflecting its poor fundamentals?
2. Cereal prices are deflating. Little pricing power. Little or no brand equity. With the price deflating, they are going to have to run hard just to stay in the same spot.
3. The March quarter results. They were horrible. Cereal revenue and EBITDA were down year on year, and there was an Operating (EBIT) loss. It seems that the reason for the sky-high PE is little or no earnings, not clever financial structuring to minimize taxes. That might be true if EBIT was strongly positive, but it is not.
4. It is geared up to the eyeballs.
5. There appears to be low or no margin of safety.
6. Michael Foods bought at auction from, of all people, Goldman Sachs - How likely is it to be a lay-up?
7. Not to mention Stiritz's age, the fact that he has much larger financial exposure to an outside personal investment than to Post, and it's a roll-up and they're rarely successful for long. If Stiritz thought Post was a "no brainer", wouldn't he have spent his money buying that (where he can influence his fate), rather than another publicly traded company on the open market?
Love to hear your thoughts kk. Enjoy and appreciate the blog.
Yes, you make good points. There may be a premium based on the book in some names, but as long as they perform over time the stock should do well too. If the business doesn't work out, then the stock won't.
The cereal business is certainly disappointing, but POST is less and less a cereal company. That's sort of the story here, but a better cereal business would obviously be better for POST and the stock price. We'll have to see.
As for the debt, keep in mind that they have raised debt for acquisitions that haven't closed yet so you have to look at net debt; they had $800+ million cash on the b/s as of the end of March. So on that basis, I think debt is under 5x EBITDA.
Michael's Food purchase from GS doesn't worry me. Yes, better not auction than auction, but GS is a financial buyer so there was probably only so much they could do with it. It's possible that POST can realize more value from it than a financial buyer due to more levers they can pull.
Stiritz is certainly not young. I wish he was 50, obviously. But he is still younger than Buffett. I think he has a few more active years in him. And yes, I wish he did own more POST stock, but at his age he is probably more in liquidation mode in terms of investments. The HLF investment, I think, is a really special situation for him. I think something going on there really got him worked up.
Anyway, this is an interesting investment to me, but not a complete no-brainer either.
Thanks for reading.
In the above article, you mention a video where Stanley Druckenmiller describes Bill Stiritz as "the greatest capital allocator of all time". Do you have a link the video where he makes this comment please? Many thanks and keep up the great work - it's refreshing to see a blog with such detailed and thoughtful company analysis.ReplyDelete
Here it is: http://www.bloomberg.com/video/stanley-druckenmiller-on-strategy-shorting-ibm-yygUXwu1TPycaQt4y0O7qQ.html
I have been doing some work on Michael (MFI) and I struggle to see that this a good business. Obviously, Stiritz et al. are smart people, but can anyone help me to understand how MFI is a good business?ReplyDelete
Was this a truly disappointing report, or is that just silly, short term thinking that misses the uniqueness of Bill Stiritz repeating his empire-building master plan? Think he might start buying back stock at these prices?ReplyDelete
It is obviously disappointing but I think it's still early in the process. I wouldn't make any decisions based on these short-term hiccups. I think the strategy makes sense, and I don't think Stiritz has suddenly gone insane or anything like that either.Delete
So we will have to see. I haven't changed my mind about this at all. I didn't think it's a straight line up as I would like to see these numbers go through the system and settle down and see what happens.
How concerned are you with the leverage at this point? I haven't had a chance to read the bond indentures closely but could the ongoing weakness in the businesses put them at risk to violate leverage covenants? Maybe my estimates are wrong, but when I compute pro forma adj EBITDA based on current guidance the leverage is something like 6.5x.
Any comments would be appreciated. Thanks.
Not worried too much yet, but yes, if things keep getting worse, it won't look too good. I would hate (as much as I like Oaktree) to see Oaktree end up owning much of the equity (via their distressed fund)...Delete
I think they are counting on some growth in Michaels and other areas so it should be OK if they pull that off.
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POST is increasing its revenue (annualized) from 1b to 4b with the acquisitions. The cereal business will not appear as such a big part of POST's revenue a year from now, but it will probably remain as a big drag to its business in the near future.Delete
How are you thinking about the potential margins for the "Active Nutrition" and "Private Label" divisions? Attune, while small, seems to be doing well and that is the bright spot at this point. Looking at historical performance, it seems like Michael can operate at something around 15% EBITDA margin and I don't think one could expect that to change within POST.
Would you expect "Active Nutrition" and "Private Label" to approach the RTE cereal margins (~25%) over time? Also, I'll echo the comment about 4B in sales. That seems like a reasonable estimate for FY15 sales.
I don't think those businesses will approach the branded cereal business margin. The cereal business is a really good, high margin business (growth is the problem).
There may be some synergies and efficiencies from putting these entities together, but I think it's more of a growth story than a margin expansion story.