Unlike the annual Simpsons Halloween tradition of the Treehouse of Horror, I don't think TreeHouseFoods (NYSE:THS) is destined to be such a scary ride for investors. With food retailers increasingly clamoring for more private-label offerings, this roll-up story could have a real opportunity in the coming years.
TreeHouse Foods started life as part of Dean Foods (NYSE:DF) before a spinoff last year. The company sells private-label pickles, powdered nondairy creamer, and a few other products and recently bought the private label soup and infant food business from Del Monte Foods (NYSE:DLM). And though there are limits to just how quickly this company can grow through acquisitions, the potential to build a solid business in private-label dry goods is pretty significant.
Which isn't to say that results are blowing down the doors. Revenue was up a bit less than 4%, and while gross margins improved slightly, income from continuing operations was lower because of stock compensation and plant closing expenses, as well as the added costs of operating as a public company. I was also disappointed to see that TreeHouse doesn't include a balance sheet or cash flow statement with the release, though the 10-Q was filed the very next day.
Given the inherent limitations of being only in the pickle and creamer businesses, I think it's safe to assume that the Del Monte Foods deal was just the first in what will likely be a line of tuck-in product acquisitions. Retailers ranging from Wal-Mart (NYSE:WMT) to Kroger (NYSE:KR) like the margin boost from private-label products, and product categories like cereals (dominated by Kellogg (NYSE:K) and General Mills (NYSE:GIS)), crackers, and sodas seem like natural avenues for possible expansion.
It'll take time, though. I believe that the spinoff agreement with Dean precludes TreeHouse from using equity in deals through the middle of next year, and the Del Monte Foods deal takes up a significant chunk of its credit revolver. What's more, the management team here is pretty experienced, and I doubt it'll bite off more than it can chew in terms of deals and integration.
TreeHouse isn't exceptionally cheap today, but it's tough to model future cash flows when you really don't know when the next deal will come, what it'll be, and how quickly it'll begin adding to earnings. Still, I'd rather wait for a better price before climbing this tree.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
