S Dhari's  Instablog

I have found a great investment opportunity in POST Holdings.

Post has #3 market share position in the $9B North American ready-to-eat cereal category; with iconic brands such as Honey Bunches of Oats, Raisin Bran, Fruity Pebbles, Shredded Wheat and Grape Nuts.

Post merged with Kraft in 1989, and was sold to Ralcorp (RAH) in 2008. Post was spun off from Ralcorp in February 2012; 1 share of Post for every 2 RAH shares held. The reason for the spin off is Ralcorp's board believes the separation will increase the aggregate equity value of Ralcorp and Post relative to the equity value of Ralcorp prior to separation.

RAH owns 20% of the shares outstanding in POST and are committed to selling/distributing all of these shares no later than 5 years from now. This definitely signals that its in RAH's best interest for POST to succeed.

The chairman of RAH, William Stiritz will move to become the chairman and CEO of POST. As the man involved in setting up the spin off, its unlikely he is throwing himself onto the sinking POST ship. This definitely signals that POST is expected to succeed.

Stiritz compensation is as follows: A 3 year contract, with base salary of $1 dollar each year. He is also gifted 100K shares at the end of each of the 3 years. Lastly, he receives 1.55M stock options with an exercise price of $31.25, which become available at the end of each of the 3 years in equal amounts, however, they cannot be exercised until he is no longer an officer at POST. Stiritz also bought 370K shares of POST in the open market. In total, 6.5M POST shares are made available in executive compensation. This definitively ties the success of the CEO and other officers to the success of shareholders.

POST has suffered over the last 3 years at RAH. From Fiscal 2009-2011 Net sales dropped 10%, operating profit dropped 8%, market share dropped 1%. Earnings were $101M in 2009, $92M in 2010, and ($361M) in 2011. The loss in 2011 was due to a $451M impairment charge. Earnings excluding this charge would have been $89M.

POST have identified the problem: At Kraft, they had an in house sales team. At Ralcorp, they relied on broker sales. At Kraft, they had a proprietary trade spending tool. At Ralcorp, had none and spending became erratic. At Ralcorp they Increased prices by twice the amount that competitors (16% vs 7%) while reducing marketing by 5%.

POST have identified how to solve it: The new management team has increased the internal sales staff and augmented its analytical capabilities. More emphasis is being placed on marketing and value perception for consumers.

POST's numbers are still a mess due to the spinoff. For the 2012 year, guidance is 1.62 EPS, $210M EBITDA. In the first half of Fiscal 2012, free cash flow (excluding one time expenditures related to the spin-off) was $62.4M. With a market cap barely above $1B, that's quite substantial. The fact that Post has taken-on a lot of debt in this spin-off could also be beneficial, if the company is able to execute on the turnaround plan. With a ton of leverage, a small increase in the value of the company assets will lead to a large increase in the value of equity.

After 3 years of Post being run horribly, POST still only lost 1% of market share. With a new start where EVERYONE'S (the parent firm, the spin-off's executives, the shareholders) success are tied together, there's more than a slight chance the company can rebound its fortunes in the next few years. Rarely do all three partners sit on the same side.

It is in the best interest of parent firm RAH for POST to succeed (RAH owns 20% of POST)

It is in the best interest of Willitz (POST Chairman and CEO) for POST to succeed (all compensation tied to stock)

POST was neglected the last 3 years at RAH, now will write its own destiny

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in POST over the next 72 hours.