TreeHouse Foods (NYSE:THS) knows that nothing smothers the bitter taste of recession like cheap sauces and soups. Far from the biggest or best-known food producer, the company may nonetheless help investors amass a small clubhouse worth of profits.
Spun off from Dean Foods (NYSE:DF) in 2005, TreeHouse is one of the few pure plays on the growth of private-label and value-branded food products -- a trend well-documented by AC Nielsen and other research groups. That shift in consumer behavior seems to be flowing toward TreeHouse's bottom line; when it reported first-quarter 2009 results in early May, management edged up full-year EPS guidance. Of course, impressive margin improvements in the company's retail segment are no doubt contributing to the upbeat outlook.
In addition, TreeHouse scores brownie points on its debt metrics. Its 0.76 debt-to-equity ratio is well below the 1.15 industry average. The outstanding $379 million on its revolving credit facility carried an average interest rate of 1.16% at the end of the first quarter, and interest on the $100 million in senior notes due 2013 runs a reasonable, if less inspiring, 6.03%. All in all, the historically acquisitive TreeHouse appears to have the financial flexibility to bring additional brands under its canopy.
The company's Food Away From Home segment, however, has sagged right along with the economy, as consumers cut back on dining out. Net sales for Q1 2009 fell 5.9%, on a 7.6% volume decrease. That performance might reflect the unusually low inventories run by the division's corporate customers earlier in the year, so future quarters could see a moderate uptick even if the economy fails to regain its appetite.
Investors should also note that Wal-Mart (NYSE:WMT) and its affiliates represented more than 15% of TreeHouse's 2008 net sales. This would appear to be nothing but a positive, but if the company's relationship with the big-box discounter ever soured, shareholders could find themselves nursing an ulcer.
In terms of near-term operational gains, it appears that the pickle business -- responsible for roughly 20% of sales -- will be TreeHouse's prime driver. Key events include the 2008 closure of an unprofitable plant and a new sales focus that strives to improve efficiency through strategic customer relationships. Any additional cause for a celebratory meal among shareholders would likely come in the form of an attractively priced acquisition. Management recently noted a "steady stream of acquisition prospects".
Potential disruptions to TreeHouse's outlook include the usual suspects: competition from the likes of Costco (NASDAQ:COST) and its value-based Kirkland brand, along with the ever-present danger of rising commodity costs. Reversion to name brands like Campbell (NYSE:CPB) could also hurt TreeHouse's cheaper products.
TreeHouse's trailing P/E of 23.7 is unhappily high, partially because of some one-time charges in 2008 that depressed earnings, but its 2010 P/E is a more reasonable 13.9. That's still a slight premium to blue-chip players Unilever (NYSE:UL) and Kraft (NYSE:KFT), but that valuation may be warranted, given the company's comparative strengths.
In the end, I can’t say that TreeHouse shares are a blue-plate special, but this may still be a fine time to nibble at them.
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