When I was a kid, I didn't need Fred Flintstone and Barney Rubble on TV commercials to convince me of what breakfast cereal to eat. I already knew I wanted a bowl of Fruity Pebbles filled to the brim. Of course, other cereals were in my regular breakfast rotation, including Honeycomb. And when Oreo O's came out in the late 1990s, it was like a dream come true: I could finally eat my favorite cookie in cereal form.
Fruity Pebbles, Honeycomb, and Oreo O's are all breakfast cereals from Post Holdings (POST -0.48%). The company makes plenty of other cereals as well, including Grape-Nuts, Honey Bunches of Oats, and Golden Crisp. And these are just the cereals it has with its Post branding. Post also owns the Malt-O-Meal brand with more than 30 varieties of bagged breakfast cereals.
For this reason, I've always thought of Post as a breakfast cereal company. And to be sure, this is the biggest part of the business. The company's fiscal 2023 ended in September. And during that year, it generated $2.7 billion in sales of cereal, which was 39% of its total sales.
Therefore, 61% of Post's business has nothing to do with breakfast cereals. This includes products such as peanut butter, sausage, and even pet food. However, a single product segment surprisingly comprises 33% of the company's total sales, making it almost as big as its cereal business.
Don't egg-nore this part of the business
According to its annual report, Post generated sales of $2.3 billion from eggs and egg products, making this the second-biggest part of the business behind cereal.
Post sells to both grocery stores and foodservice companies. It sells eggs in the shell -- just like the largest publicly traded egg company, Cal-Maine Foods. But it also sells egg products, including brands such as Egg Beaters and Bob Evans as well as precooked eggs.
Since the start of the pandemic, this has been an egg-cellent business for Post. Between supply chain challenges, inflation, and outbreaks of the bird flu, egg prices have skyrocketed.
This increase in the price of eggs is reflected in Post's own financial results. In 2021, the company had net sales of nearly $1.6 billion for eggs and egg products. In 2023, it had net sales of $2.3 billion for the same things, an increase of 48% in just two years.
Post's profits in the egg category consequently surged as prices jumped. The chart below shows that the company's diluted earnings per share (EPS) peaked right when egg prices did. The same thing happened for Cal-Maine.
US Consumer Price Index: Eggs data by YCharts
If I were a Post shareholder, I'd be worried about future profits after looking at this chart. It would seem that the company's profits are only up because egg prices are favorable. But with egg prices normalizing, the benefit should reverse.
However, there may be more here than meets the eye. Post breaks out its sales to foodservice channels -- it had $2.4 billion in foodservice sales in 2023. The majority of these sales were eggs. However, 80% of this is from selling value-added egg products, which have a higher profit margin for the company, rather than just eggs in the shell.
In 2023, Post's profit margin for its foodservice segment jumped to 14% -- double its 7% margin in 2022. According to management, it's not really seeing competition for these value-added egg products in foodservice. Therefore, perhaps its margins won't contract quite as much as egg prices come down.
Is Post stock a buy?
Post sells some of my favorite cereals and it's interesting to note its egg business. That said, these things don't necessarily make Post stock a buy. In recent years, top-line growth was meager. And while EPS is up partly thanks to strong results in the egg business, growth on the bottom line hasn't necessarily been anything to write home about lately.
Post is a strong, consistent business. But I doubt it will produce enough top-line growth and bottom-line growth to outperform the S&P 500 average over the next three to five years. Moreover, it doesn't pay a dividend like other comparable companies, so there's no incentive to hold for income either.
I might not be planning to add Post stock to my personal portfolio anytime soon. But I do still plan to keep my pantry stocked with its Fruity Pebbles and Oreo O's as much as possible.
