Post Holdings (POST +2.05%) is a company with a portfolio of cereal and snack brands that has grown its balance sheet ever since the spin-off from its parent company in 2012. Its parent company spun off Post in 2012, but its 10-K provides us with financial information that goes all the way back to 2009. Post has posted lackluster results since 2009 in comparison with its peers. Given its relatively small market cap of $1.9 billion, it may be a prime candidate to be taken private in a buyout or be acquired by a competitor.
History of sub-par performance
Post's sales have been practically flat since 2009. Its earnings have ranged from $100 million in 2009 to negative $424 million in 2011 and back to $9.8 million in 2013. We can gain further insight by comparing Post to competitors Kellogg Company (K +0.00%) and General Mills (GIS +0.57%). One reason for Post's earnings troubles is its high selling, general, & administrative expenses, or SG&A.
Post's SG&A expenses as a percentage of sales have risen to 29% in 2013 from 25% in 2011. In 2013, General Mills and Kellogg reported SG&A percentages of 20% and 22%, respectively. From 2011 to 2013, Post's gross margin has fallen from 46.6% to 41.1%, which indicates sustained pressure on pricing. General Mills and Kellogg's gross margins for 2013 came in at 36% and 41%, respectively. Post sports heftier margins than its competitors and that may be one bright spot for the future, but recently its margins have fallen and this has put a damper on its earnings.
The case for a buyout
Attractive buyout qualities can vary. These qualities include restructurable debt loads, companies with poor earnings but solid cash flows, and opportunities for cost cutting. Post has all of these qualities.
Companies with unfavorable debt loads, like Post, can benefit from favorable credit terms available to larger suitors. The idea is to use the suitor's ability to refinance debt at a lower interest rate to save on debt payments. Post pays 7.375% on its long-term debt, which is much higher than the rates its competitors pay.
Post has recently issued large amounts of common stock. This is usually management's last means of raising cash since it dilutes shareholders. Debt is usually the way to go to raise cash, but Post's financial standing does not make that ideal. Despite Post's abysmal earnings track record, its cash flow from operations has been positive and consistently higher than its net income. This means that the underlying business of Post is generating cash, but its earnings do not depict this.
A potential suitor may see Post as an attractive investment. If it was taken private, Post could more easily improve its business model away from the investing public and analysts' quarter-to-quarter earnings expectations. The suitor would pay for the company with debt and/or cash, consolidate it on Post's balance sheet, and restructure the existing debt on more favorable terms. Post would use its cash flow from operations to pay down the debt, which makes this an attractive strategy. There is also significant room for cost cutting in its SG&A expenses, which is the bread and butter of what private equity firms do to increase value. The ultimate end if Post were taken private would either be a sale to a competitor or an IPO at a higher valuation.
Foolish takeaway
Post represents an opportunity for investors who are looking for potential buyout candidates. It has many qualities that private equity firms look for when they make investments. Post's falling margins, outsized SG&A expenses, and unfavorable debt terms have led to lackluster performance. This is perfect for a private equity firm that wants to come in and use Post's positive operating cash flow and underlying business operations as a restructuring opportunity. Foolish investors would be wise to pay further attention to Post.
