If this fiscal fourth quarter is a sign of what Ralcorp Holdings (NYSE:RAH) has to offer investors, then many of them are right to wonder why management did not accept ConAgra's (NYSE:CAG) overtures to buy the company. The company is certainly trying to change things up, including spinning off its branded cereal business, but this is supposed to be a good time for the makers of private label food and Ralcorp is looking decidedly beige.

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An Iffy End to the Fiscal Year
Ralcorp closed out the fiscal year with reported revenue growth of 8%, half of that coming from the acquisition of American Italian Pasta Company. Core revenue missed estimates slightly, with reported volume growth of 3% and an internal volume contraction of 4%. Volume erosion was consistent across product lines, while the snack/sauce/spread, bakery and private label cereal businesses did scratch out some overall net growth. (To know more about acquisition, read Analyzing An Acquisition Announcement.)

Profitability was even murkier. Generally accepted accounting principles gross margin shrank four and a half points, while the adjusted gross margin declined a more tolerable 70 basis points. Kudos go to Ralcorp management for giving a lot of information, though, including the nugget that higher prices for ingredients, packaging and freight rose cost of goods sold by $78 million.

At the operating line, it's just a mess. Ignoring the impairment charge, Ralcorp saw about 30 basis points of erosion in its adjusted margin. Segment operating profits were up about 2% and this is arguably the number to watch. What's interesting is that the cereal business performed poorly, while the others did pretty well. (To know more about income statement, read Understanding The Income Statement.)

Pulling the Plug on Post
As investors have known for a little while now, Ralcorp will be spinning off the Post Cereal business to its shareholders. Given the performance of this business and this company's preference to focus on private label foods, this makes ample sense. Cereal sales were down this quarter, and the company just does not seem to be able to really compete effectively with General Mills (NYSE:GIS) and Kellogg (NYSE:K) in the cereal aisle.

Will Post be better post-split? Well, the company took a sizable impairment charge on the business this quarter, and that's not exactly a vote of confidence (though required accounting policies don't always match on-the-ground reality). Moreover, it is difficult to see how a small branded company can compete when it comes to marketing and promotion.

More and Better, Please
These are supposed to be good days for private label food producers, with off-label brands taking more and more shares from the likes of General Mills, Kellogg and Kraft (NYSE:KFT). To that end, Ralcorp isn't exactly doing poorly, but it just seems that they should be doing better and maybe coming closer to the volume growth at TreeHouse Foods (NYSE:THS) (which admittedly isn't all that high either).

Ralcorp also needs to deliver better margins. Stripping away charges, accelerated amortization and so on, the core profitability of the private label business looks pretty good, and perhaps the decision to stop chasing its tail in branded cereal will help more than I realize. Nevertheless, Ralcorp needs to deliver better margins and better returns on capital to justify snubbing ConAgra's offer.

The Bottom Line
There is a notable dearth of cheap packaged food stocks - arguably because a lot of investors have already bid these up as safe havens in a tough market. Ralcorp is neither dramatically overpriced nor especially cheap - putting it in the same bucket as Campbell Soup (NYSE:CPB), General Mills, ConAgra and so on. Want a cheaper stock? Kraft and Kellogg are cheaper (though not really that cheap in an absolute sense), but investors will have to look overseas or further down the chain to find bargains.

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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.



Tickers in this Article: RAH, CAG, GIS, K, KFT, THS, CPB

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