Since being spun from Ralcorp in 2012, Post (NYSE:POST) Chairman (and up to a few weeks ago CEO) Bill Stiritz engaged in an aggressive spree of acquisitions in an attempt to diversify Post's declining core cereal business. The pace of the acquisitions revved up in 2014 with six deals totaling $3.7 billion; whereas Post's market capitalization is less than half that amount. The strategy of aggressively buying businesses has not been a great one thus far for Post. Year to date the stock is down more than 15% and is among the most heavily shorted US stocks. On November 24th, Post Holdings released its Q4 and Fiscal year 2014 results. As expected, another significant loss was reported. This analysis will take a look at what went wrong, and what went right, then use these data points to project how Post will fare in 2015.
The acquisition of Dymatize is the first strategy which appears to be a total fail. Post purchased Dymatize in Q1 2014 for $380 million. Dymatize is a somewhat unknown brand outside of hardcore gym buffs. If you tasted this stuff you would know why most consumers don't go for it. The products have a niche market and a limited retail footprint; they're mostly sold at GNC and Vitamin shoppe. It is likely that Post envisions using its distribution system in grocery stores to expand the brand. That won't work. Consumers buying supplements at a grocery store are not the hardcore workout enthusiasts who currently buy the products. This product simply will not sell in a grocery store next to highly recognized brands that have the consumer appeal to suburban grocery store shoppers.
Hormel (NYSE:HRL) recently made a comparable acquisition when it purchased Cytosport (maker of Muscle Milk) for $450 million in Q2 2014. Cytosport is in line to generate $370 million of revenue for 2014. Dymatize only generated $146 million during the first 9 months of 2014. Paying 15% more for a company that generates nearly 100% more in revenue puts Hormel in a better position than Post. Hormel expects the Cytosport brand to add 5 cents to 2015 EPS, while Post expects the active nutrition segment (which included Dymatize and Premier Nutrition) to continue dragging down EPS in 2015. Post would have been much better off buying Cytosport.
Post's new found love for active nutrition (which is an ironic joke if you actually read the ingredients of Dymatize products) continued in 2014 with the purchase of Powerbar and Musashi. Again, a total fail. Consumers are moving away from brands like Powerbar and gravitating to healthier options. The acquisition was closed at the end of Post's 2014 fiscal year, so we do not have the financials. My guess would be to expect weakness in 2015 sales, as Nestle was not having much luck with the brand for many years.
Before switching out of the active nutrition segment, it is important for those long Post to be aware that Chairman and former CEO, William Stiritz, led the effort to purchase these brands while being the single largest individual shareholder of a competing company. Mr. Stiritz owns 7 million shares of Herbalife (NYSE:HLF), which sells protein bars similar to Powerbars and nutrition powder similar to Dymatize. I can't imagine the chairman of Ford (NYSE:F) being a significant owner of GM stock, or Indra Nooyi at PepsiCo owning a big stake in Coca Cola. Managers who own large personal stakes in competitors should cause reservation to any objective investor.
The $2.45 billion acquisition of Michael Foods represented the largest expenditure of the $3.7 billion spent in 2014. While it certainly helps Post get closer to its objective of $4 billion in revenue, its still unclear how this will affect the bottom line. On one hand, sales were strong with Michael Foods seeing almost double digit growth of 9.7% for Q4 on revenue of $534.3 million. However, the brands under the Michael Foods division are somewhat questionable. The portfolio is highly diversified between low end products sold at retailers like Walmart (NYSE:WMT) and high end organic products sold at Whole Foods (WFM). Most grocery stores sell in house branded milks, cheeses and eggs that directly compete with Michael Foods' different branded products. I question how willing consumers will be to pay a premium for highly processed, albeit convenient, products. Continued commodity price increases could contract margins and disappoint investors for 2015.
Through Dakota Growers Pasta Company, Post has acquired a significant stake in the dried pasta industry. Dakota Growers was purchased in January 2014 for $370 million. Pasta sales have been weak in 2014. Dakota Growers Dry pasta sales for the first 9 months were down 5.6%, significantly lagging the overall industry, which was flat. Consumers are trending away from traditional dried pasta and moving toward healthier options. Post has limited exposure to whole grains and organics, with no exposure to gluten free. These areas represent the growth segments in dried pasta that are being missed at Dakota. Shifting toward these growth areas will require additional capital expenditures and hurt 2015 EPS.
Lastly, Post acquired Golden Boy Foods in Q1 2014 for $320 million CAD and American Blanching Co in Q4 for $128 million. Both produce off label niche and organic peanut products, an area which is growing nicely. Hormel recently acquired Skippy peanut butter for $665 million plus $42 million for Chinese operations, for a total of about $707 million. Organic and off labels are positioned better for future growth with consumer trends towards affordable and healthier options. Post got the better deal on this purchase.
Post will face material headwinds in 2015, largely by their own doing. The series of acquisitions must stop in 2015. Expect future goodwill impairments and continued trouble from the Dymatize and Dakota acquisitions. Some shift into organic and all natural foods will help Post face changing consumer trends, but it may not be enough to bring Post back to profitability. With the recent run-up in the stock and the large debt load, I will remain cautious on Post for 2015.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.