Ralcorp Cashes In on Trading Down

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As Foolish investors, we know that the latest word from Wall Street is often best taken as a source of amusement, rather than as ivory-tower insight. But sometimes, the Street does get it right -- and that appears to be the case with Ralcorp Holdings (NYSE: RAH), a manufacturer of private-label food staples that's gaining steam with the trade-down effect.

As cash-strapped consumers abandon brand loyalty and wheel their grocery carts toward the cheap stuff, Ralcorp is well positioned to benefit from its full line of snacks, sweets, condiments, and sauces. Now it's enjoying an analyst upgrade, a Forbes endorsement, and even a big "boo-yah" from Jim Cramer.

To understand why, just keep an eye on fellow shoppers' buying habits the next time you're at the supermarket. Even if you can only identify a move from, say, ultra-pricey Hain Celestial (Nasdaq: HAIN) products to Costco's (Nasdaq: COST) Kirkland brand, it's a reasonable bet that a lot of consumers in these trying economic times are also abandoning Kellogg (NYSE: K) in favor of Ralcorp's knock-off store brands.

But Ralcorp would be an attractive investment even without the trade-down effect. In its fourth quarter of 2008, 68% of its sales growth came from Post Foods, which it acquired from Kraft Foods (NYSE: KFT) earlier in the year. That acquisition gives Ralcorp a mix of premium and generic brands that distinguishes it from competitor Treehouse Foods (NYSE: THS). Moreover, Ralcorp holds an approximately 19% interest in Vail Resorts (NYSE: MTN), which, ostensibly, offers the company a good chance to take part in any economic upturn.

Ralcorp isn't a classic blue-chip name; but many such stalwarts have revealed an inner shade of periwinkle in 2008. And as fellow Fool Julie Clarenbach recently counseled, playing traditional defense in today's nontraditional market is a dangerous game.

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Fool contributor Mike Pienciak continues to support local farmers and producers by shopping at his neighborhood greenmarket. He does not hold shares in any of the companies mentioned in this story. Vail Resorts is a Motley Fool Hidden Gems pick. Kraft Foods is a Motley Fool Income Investor recommendation. Costco is a Motley Fool Inside Value and Motley Fool Stock Advisor pick. The Motley Fool is investors writing for investors.

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 30, 2008, at 3:52 PM, pvfund wrote:

    Irrespctive of their business prospects, have you looked at their debt and when it is up for refi? Have you even considered their exposure on commodity hedges at its peak? I'm short and this is my only short position now!

  • Report this Comment On December 30, 2008, at 6:57 PM, TMFGlide wrote:

    pvfund:

    Thanks for the comment. Although I did not perform a comprehensive analysis, I did eyeball Ralcorp's debt and their hedging program. Looking at p. 51 of the 2008 10-K, the company has a number of Fixed Rate Senior Notes that come due beginning in December 2010 out to 2022. Although levels are not ideal, they appear manageable given the company's revenue and income prospects. Presently, RAH's current ratio is 1.65. Quoting from p. 50 of the 10-K in reference to commodity hedging, "During fiscal 2008, hedge gains (net of hedge losses) totaling $6.2 were deferred into accumulated other comprehensive income, $56.2 of net gains were reclassified into earnings, and net losses of $.2 representing ineffectiveness were recorded in earnings as incurred." I'd be interested in your take.

    -Mike

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NASD 2,374.41 -16.87 -0.71%

Related Tickers

3/19/2010 4:07 PM
RAH $66.40 Down -0.71 -1.06%
Ralcorp Holdings,… CAPS Rating: ****
THS $44.19 Down -0.01 -0.02%
TreeHouse Foods, I… CAPS Rating: ***
K $53.43 Up +0.59 +1.12%
Kellogg Company CAPS Rating: ***
COST $60.72 Down -0.55 -0.90%
Costco Wholesale C… CAPS Rating: ****
HAIN $17.46 Down -0.06 -0.34%
The Hain Celestial… CAPS Rating: ****
MTN $39.91 Down -0.07 -0.18%
Vail Resorts, Inc. CAPS Rating: ***
KFT $29.63 Down -0.20 -0.67%
Kraft Foods, Inc. CAPS Rating: ****

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