TreeHouse Foods: The Easy Money Has Been Made

Jun. 01, 2022 4:25 AM ETTreeHouse Foods, Inc. (THS)CALM, FREE, SAFM, SMPL, TWNK1 Comment1 Like

Summary

  • Recent performance achieved by TreeHouse Foods has been quite impressive, especially compared to the broader market.
  • Long-term, the picture for the business looks fine, but it is facing some headwinds right now that could very well worsen.
  • Although shares are still cheap, the company probably makes more sense as a 'hold' prospect at this time.
  • Looking for option income ideas that focus on capital preservation? I offer this and much more at my exclusive investing ideas service, Crude Value Insights. Learn More »

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With a market capitalization of just $2.32 billion as of this writing, TreeHouse Foods (NYSE:THS) is a fairly small player in the manufacturing and distribution of private label foods and beverages throughout North America. Over the past few years, the company has been on an interesting ride, with revenue falling but its bottom line improving significantly. Cash flows have been more consistent during this timeframe, but still have shown no real trend. After some significant changes to the company's operations, combined with having to pass on some of the inflation it is seeing to its customers, the picture for the company this year should finally be better on its top and bottom lines. This comes even though the first quarter of 2022 proved to be something of a rough start for shareholders. At the end of the day, shares of the company are priced at levels that should be considered appealing. But given the pressures the company is facing and the risk that management might not achieve their targets, I cannot help but approach the company more cautiously than I did late last year.

The picture is changing

Back in November of 2021, I wrote my first article about TreeHouse Foods. At that time, I acknowledged the company's mixed operating history. Revenue had fallen almost every year compared to the year prior, while profitability had actually shown some improvement but was still coming in weaker than what some investors might expect. But cash flows for the company looked fairly solid and the firm was starting to show some improvement on its top line. Ultimately, I told my readers that uncertainty exists for the business. But with how cheap shares were at the time, I could not help but to rate it a ‘buy’. Since then, the company has performed even better than I would have anticipated. While the S&P 500 has dropped by 10.3%, shares of TreeHouse Foods have generated a return for investors of 10.9%.

Historical Financials

Author - SEC EDGAR Data

To begin with, we should probably discuss the rest of the company's 2021 fiscal year. When I last wrote about the firm, we only had data covering the first three quarters of that year. Now we know how 2021 ended. According to management, sales came in at $4.33 billion. Sadly, that was down 0.5% compared to the $4.35 billion generated in 2020. Overall, revenue in the final quarter of the year of $1.17 billion, was roughly $12 million lower than it had been in the final quarter of 2020. It should be mentioned that some of the recent pain the company has seen came from its sale, in June of 2021, of its RTE Cereal business. The company also suffered in some other ways. For instance, last year, the firm generated a net loss of $12.5 million. That compares to the $13.8 million profit achieved in 2020. Most of this pain really came in the final quarter of the year, with a net loss of $29.1 million coming in far worse than the $34.4 million profit achieved in the final quarter of 2020. Other profitability metrics also worsened. Operating cash flow dropped from $416.7 million in 2020 to $332.1 million last year. Even EBITDA worsened, declining from $503.1 million to $382.4 million.

At first glance, these results may cause investors to run for the hills. However, we need to dig deeper to see if this concern is warranted. For instance, revenue in the first quarter of 2022 was $1.14 billion. That's 7.9% above the $1.06 billion generated just one year earlier. According to management, this sales increase is largely due to pricing actions aimed at recovering commodity and freight cost inflation the company experienced. If anything, it looks like the company expects this picture to continue through the rest of this year. Overall sales for 2022 are currently forecasted to be at least 11% higher than they were in 2021.

Historical Financials

Author - SEC EDGAR Data

Although management succeeded in raising prices, that did not stop profits from worsening. In the first quarter of 2022, the company generated a net loss of $3 million. That compares to the $1.5 million net profit generated the same time one year earlier. Operating cash flow fared even worse, turning from a negative $5.5 million to a negative $70.4 million. Even if we adjust for changes in working capital, the picture is still unfavorable, with the metric plummeting from $52.5 million to $2.1 million. Meanwhile, EBITDA went from $101.7 million to $57.5 million. Seeing these results, even I recoiled. However, management does believe that EBITDA for 2022 will be between $385 million and $415 million. At the midpoint, this would translate to a 4.6% increase over what the company achieved last year. If we assume a similar improvement will be experienced on the operating cash flow front, then that metric should be about $347.4 million for the year.

Trading Multiples

Author - SEC EDGAR Data

Given these results, we can effectively price the company. Using our 2021 figures, the business is trading at a price to operating cash flow multiple of 7. This drops to 6.7 if we rely on 2022 estimates. Using the EV to EBITDA approach, the multiple should drop from 10.5 if we use 2021 figures to just 10 if we use 2022 figures. To put the pricing of the company into perspective, I decided to compare it to the same five companies that I compared it to when I last wrote about the firm. On a price to operating cash flow basis, these companies ranged from a low of 4.9 to a high of 73.1. In this case, only one of the five companies was cheaper than TreeHouse Foods. Using the EV to EBITDA approach, the range was from 3.7 to 35.3. In this scenario, two of the five companies were cheaper than our target.

Company Price / Operating Cash Flow EV / EBITDA
TreeHouse Foods 7.0 10.5
Sanderson Farms (SAFM) 4.9 3.7
Hostess Brands (TWNK) 14.8 14.6
The Simply Good Foods Company (SMPL) 32.9 27.6
Cal-Maine Foods (CALM) 73.1 35.3
Whole Earth Brands (FREE) 13.9 9.4

Takeaway

When I last wrote about TreeHouse Foods, I was optimistic because of the recent improvement that we had seen. I was also happy about the low trading multiple the company was going forward. While the latter is still true, I feel less certain about the former. Though sales are slated to rise this year, the fundamental picture for the company's bottom line doesn't look great. Management believes that it will improve year over year. But data seen in the first quarter was already far from great. All of these factors combined, added on to the fact that investors have already seen a nice bit of upside at a time when the broader market has fallen, leads me to believe that TreeHouse Foods is now more appropriately designated a ‘hold’ prospect than it is a ‘buy’ prospect.

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This article was written by

Daniel Jones profile picture
23.26K Followers
Robust cash flow analyses of oil and gas companies

Daniel is currently the manager of Avaring Capital Advisors, LLC, a registered investment advisor that oversees one hedge fund, and he runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein.

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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