Value Line is regarded as the best independent research available. More than just recommendations, Value Line provides the rationale behind its picks for greater understanding.
- Don D., California
Coverage Initiation: Post Holdings (POST)
Post Holdings (POST) is a leading manufacturer, marketer and distributor of branded ready-to-eat cereals in the United States and Canada. The company’s brand portfolio includes such well-known offerings as Honey Bunches of Oats, Pebbles, Shredded Wheat, Raisin Bran, Grape-Nuts, and Honeycombs. Although the breakfast cereal market is highly competitive, Post, the third largest industry participant, is an important player.
The company traces its roots back to 1895, but has not spent the entire time as a stand-alone entity. Most recently, Post was spun off from Ralcorp in early 2012. In 1895, Charles William (C.W.) Post created "Postum," a cereal beverage. In 1897, Post introduced Grape-Nuts cereal, one of the first ready-to-eat cold cereals, which is still one of its major brands to this day. From 1925 to 1929, the Postum Cereal Company acquired over a dozen companies and expanded its product line to more than 60 products. The company changed its name to General Foods Corporation and over several decades introduced brands such as Post Raisin Bran (1942), Honeycomb (1965), Pebbles (1971) and Honey Bunches of Oats (1990). General Foods was acquired by Philip Morris Companies in 1985, and subsequently merged with Kraft Foods (Kraft) in 1989. In 2008, the Post cereals business was split off from Kraft and combined with Ralcorp. As noted above, Post is a separate entity again after the recent spinoff from Ralcorp.
Post's products are primarily manufactured through four company owned facilities in Battle Creek, Michigan; Jonesboro, Arkansas; Modesto, California; and Niagara Falls, Ontario. Its products are sold through a variety of channels, including grocery stores, mass merchandisers, club stores, and drug stores. Note that Wal-Mart (WMT – Free Value Line Research Report for Wal-Mart) accounts for about 20% of Post’s top line, making the relationship with this retailer particularly important.
The cereal industry is mature and highly competitive. As the third largest industry participant, the company faces well-heeled competitors with equally recognizable brands. Factors such as product innovation, product quality, price, brand recognition and loyalty, effectiveness of marketing, promotional activity, and the ability to identify and satisfy consumer preferences are vital to success. Note that the actions of Post’s competitors may require Post to make similar moves itself, such as aggressive promotional pricing, to maintain market share. This could have a material impact on Post’s top and bottom lines, however failure to match competitors moves could result in a loss of market share, which would also affect performance.
Commodity prices are an important expense. Largely made of grains, the cost of creating cereal can increase quickly if commodity prices rise. These prices can usually be passed on to consumers over time, but not always. Moreover, the time between a rise in input costs and when those costs can be passed on can temporarily depress bottom-line results. If costs can’t be passed on, however, results could be hurt for a longer period unless cost cuts can be made to offset expenses.
As a food processor, the company is subject to many regulations. These include federal, state, local, and foreign laws and regulations. Keeping up with such regulations is an ongoing effort, and any regulatory changes may result in a material expense for the company. With only four main facilities, regulatory changes could also cause production problems if they necessitated even a temporary closure of a plant.
Post has a strong history of innovation and intends to keep this as a focus as it looks to grow as a stand-alone company. Note, however, that anticipating and adjusting to customer tastes can be difficult and costly. That said, an additional stated purpose of the company’s development efforts is cost containment. In a similar vein, another avenue of growth that is actively being pursued is the extension of existing brands into other, related product categories. For example, Pebbles Treats were recently successfully added to the Pebbles brand. Such extensions offer a relatively low cost way to expand sales and reach. Management also reports that it is willing to enter the acquisition market if the right opportunity arises, though such purchases come with risks.
Post Holdings is one of the largest cereal makers in the country. One of the reasons given for the recent spinoff was that it would allow management to focus more keenly on the cereal business. Although it operates in a mature and competitive market, being held directly accountable can, indeed, focus the mind. Interested subscribers should monitor Value Line’s quarterly coverage of the company, while keeping an eye out for Supplementary reports highlighting late-breaking news.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.