Back in early February, food firm Ralcorp (NYSE:RAH) spun off its cereal business into a new publicly-traded company. Post Holdings (NYSE:POST) now houses the namesake cereal brands and other familiar names including Pebbles, Grape-Nuts and Honeycomb. Post is just getting going on its own, but could be an interesting investing story as spinoffs generally have a solid performance track record.
Post considers itself the third-largest seller of ready-to-eat cereals in the United States. It recently estimated a market share of 11.2%, which stands behind General Mills (NYSE:GIS) and Kellogg (NYSE:K) domestically. PepsiCo's (NYSE:PEP) Quaker Oats is another formidable rival. During its most recent fiscal year (through 2010), it reported $1 billion in sales, or a decline of about 7% from the previous year. Sales have hovered around the $1 billion mark for the past several years. It recently reported net income of $92 million for a year-over-year profit decline of 9%. Free cash flow was approximately $111.3 million, or $3.23 per diluted share. See Commodity Prices Are Pinching Consumers.
When Ralcorp officially filed its spinoff intentions with the SEC, it announced that Post would now be free to pursue its own growth strategies, spend and invest as it sees fit, and allocate capital according to its own business needs. It also freed Ralcorp to do the same. This increased specialization is a key reason that spinoffs tend to perform well.
Another reason Ralcorp spun off Post is because Post isn't growing and it likely saw its prospects as limited as part of Ralcorp's other businesses. The spinoff is obviously intended to help Post reverse course and hone its strategy into one that is more geared to growth. But as it stands currently, the business is quite profitable and generates decent cash flows. Operating margins average around 20%. See 22 Ways To Fight Rising Food Prices.
The Bottom Line
The cereal business is also pretty stable over the long haul. Post has been around for more than 110 years and this bodes well for its future existence. The cereal market isn't growing like it used to but still represents an annual market size of $9 billion. With increased product innovation and the newfound ability for Post to compete on its own, the stock could be able to post decent annual growth and offers a fair degree of downside protection given food sales are relatively recession resistant. The fact that Wal-Mart (NYSE:WMT) is its largest customer at 21% of sales speaks to the fact its products qualify as basic necessities.
Post currently trades at trailing free cash flow multiple of about 10. Kellogg trades at roughly 12 and General Mills at 13.5. This certainly suggests some potential for valuation expansion, with a few years of solid financial results and hopefully modest growth trends going forward. See 5 Generic Products That Are Just As Good.