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What TreeHouse Foods’ Quarterly Report Tells Us

By Sharda Sharma – Mar 3, 2014 at 8:51AM

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TreeHouse has started the year on a high note, but there could still be better times ahead.

TreeHouse Foods (THS 2.84%) has begun 2014 on a high note. The food manufacturer's recently released fourth-quarter results were well received by the market, as net sales in each of the company's segments improved. TreeHouse shares soared after the results and have gained more than 10% since. The company is looking to capture market share in different segments going forward, and this is why it is suing Green Mountain Coffee Roasters (GMCR.DL) to eliminate its monopoly in single-serve cups.

In addition, TreeHouse is adopting a number of measures to grow its business, and we will take a look at them one by one.

Strong across the board
As a result of good marketing and supply chain strategies, TreeHouse's earnings grew by 14% in the last quarter. Its three segments -- grocery, food service, and industrial -- reported outstanding revenue growth, and this was a key reason behind the growth in TreeHouse's gross margin and channel profitability. 

The private-label single-serve coffee and hot beverage category generated $180 million in the fourth quarter. In addition, the acquisitions of Associated Brands and Cains Foods helped TreeHouse expand its presence in dry blended products and salad dressings. 

TreeHouse's private-label single-serve coffee and hot beverages have helped the company perform well, as we just saw. This is why TreeHouse is suing Green Mountain, the maker of Keurig brewers, since it believes that the company is still trying to maintain its monopoly in single-serve brewing even after the expiration of certain patents.

TreeHouse is accusing Green Mountain of entering into agreements with suppliers that were designed to give it monopoly power in the market once the patents expired. Furthermore, Green Mountain is said to be launching a new version of its Keurig brewer this year that will have an "anticompetitive lock-out technology." This would prevent the new brewers from functioning with cups made by unlicensed competitors. So, TreeHouse is looking to prevent this and is going to court in a bid to prevent the restriction of growth in this lucrative market.

Growth and efficiency are key drivers
TreeHouse expects its private-label single-serve coffee and hot beverage brands to outperform in the next quarter as well. It looks like the company is ready to confront Green Mountain head-on in this market.

TreeHouse expects 9% to 10% growth in overall sales in 2014. Also, the company expects that a relaxation in exchange rates between the Canadian dollar and the U.S dollar in 2014 should lead to an enhanced profit margin. 

Moreover, TreeHouse expects agricultural input costs to decline in 2014 but costs associated with packaging and energy are expected to increase. Keeping this in mind, TreeHouse is planning to make its operations more efficient. TreeHouse is looking to maintain its operating margin at a steady level by focusing on more efficient products, including flavors and packaging options. These moves are expected to improve TreeHouse's gross margin by at least 100 basis points this year. 

Also, improving consumer trends should aid TreeHouse's growth. As peer Campbell Soup (CPB 1.94%) recently pointed out, its business in the second quarter gained momentum.  Also, Campbell is investing aggressively in promotions and has grown its product portfolio considerably. The company launched eight new soups recently, and it is promoting its Bolthouse Farms brand as well.

Moreover, Campbell's focus on organic offerings is another reason to be positive about the company. Since TreeHouse is also focusing on items such as salad dressings, it could benefit from the organic market also.

TreeHouse Foods is making efforts to improve its operations and also increase market share. The company's single-serve products are performing well and its recent acquisitions should also add to its growth momentum. With earnings expected to grow at double-digit rates in the next five years, TreeHouse could be a good investment in light of its methodical strategies.

Sharda Sharma has no position in any stocks mentioned. The Motley Fool recommends Green Mountain Coffee Roasters. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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