Post Holdings Stock: 2 Key Catalysts To Watch (NYSE:POST)

Elevator Pitch

I assign a Buy investment rating to Post Holdings, Inc.’s (NYSE:POST) shares.

There are two catalysts for POST that investors ought to pay attention to. The first catalyst is the greater-than-expected inorganic growth potential for Post Holdings, considering its improved financial position following the sale of its shares in BellRing Brands (BRBR). The second catalyst is Post Holdings reporting higher than expected EBITDA for full-year fiscal 2023, with the improvement in profitability for its Refrigerated Retail segment being the key driver. In consideration of these two re-rating catalysts, I think that POST is deserving of a Buy rating.

Company Description

Post Holdings refers to itself as “a consumer packaged goods holding company with businesses operating in the center-of-the-store, refrigerated, foodservice and food ingredient categories” in its media releases.

The company’s Post Consumer Brands, Foodservice, Refrigerated Retail, and Weetabix business segments accounted for 38%, 36%, 18%, and 8% of its full-year fiscal 2022 (YE September 30) revenue, respectively as highlighted in its most recent 10-K filing.

A Brief Description Of POST’s Key Business Segments

BellRing Stock Offering Will Reduce POST’s Net Debt

Seeking Alpha News reported on November 20, 2022 that Post Holdings “announced an underwritten offering of all of its 4.59M shares of BellRing Brands.” As highlighted in the Seeking Alpha News article, this is part of a deal “to repay and retire a portion of the principal amount of the company’s $130M incremental term loan.” I estimate that POST will be able to reduce its net debt by approximately $100 million based on the offer price of $22.30 for BellRing Brands’ shares.

There are two potential positives associated with POST’s recent BellRing Brands shares offering and the resulting lower net debt for the company.

One positive is that reduced financial leverage can boost Post Holdings’ valuations via both an increase in future earnings and a higher valuation multiple. The decrease in net debt translates into lower net interest expenses, while POST can command a relatively higher valuation ratio on the basis of a moderation in credit risks (lowering of its net debt ratio).

The other positive is that POST is now in a better financial position to consider various value-accretive capital allocation options. At the company’s most recent Q4 FY 2022 results briefing on November 18, 2022 (prior to the latest BellRing stock offering), Post Holdings emphasized that that its reasonably comfortable adjusted financial leverage ratio “net of our BellRing position” puts it in a good position for “M&A”.

In a nutshell, the reduction in Post Holdings’ net debt is positive for POST’s share price outlook and inorganic growth prospects.

Fiscal 2023 EBITDA Guidance Appears To Be Too Conservative

Post Holdings’ management has guided for a fiscal 2023 EBITDA in the $990 million to $1.04 billion range, as highlighted in its Q4 FY 2022 results media release. This is equivalent to an expected EBITDA of $1,015 million for FY 2023 and a modest +5% EBITDA expansion (as compared to FY 2022 EBITDA of $964 million) based on the mid-point of POST’s guidance.

Specifically, I am of the view that Post Holdings’ Refrigerated Retail business segment has the greatest potential to achieve a positive surprise.

According to historical financial data taken from S&P Capital IQ, the Refrigerated Retail segment’s fiscal 2022 EBITDA of $138 million was -21% below its pre-COVID FY 2019 EBITDA amounting to $175 million. Also, the 13.3% FY 2022 EBITDA margin for POST’s Refrigerated Retail business was -590 basis points lower than the company’s pre-pandemic fiscal 2019 EBITDA margin of 19.2%.

Post Holdings had noted at its most recent quarterly investor briefing that “high egg prices inhibited volume and profit” for the Refrigerated Retail business segment in fiscal 2022. A normalization of egg prices in FY 2023 should be supportive of higher operating profit and margins for POST’s Refrigerated Retail business in the new fiscal year.

Also, POST is expected to make some positive changes to the Refrigerated Retail segment’s supply chain strategy. At its earlier Q3 FY 2022 earnings call in August this year, Post Holdings acknowledged that the Refrigerated Retail business has “leveraged more third-parties” to deal with supply chain challenges which comes at “a temporary cost.”

Going forward, as supply chain headwinds ease, Post Holdings’ Refrigerated Retail business is very likely going to cut back on outsourcing and rely more on self-production. This should be a very substantial driver for a recovery in the Refrigerated Retail segment’s operating profit margins in the future.

At the company level, the sell-side analysts see Post Holdings’ overall EBITDA margin improving slightly from 16.5% in fiscal 2022 to 16.9% for FY 2023 as per S&P Capital IQ’s consensus data. In comparison, POST’s pre-pandemic company-level FY 2019 EBITDA margin was a much higher 21.3%.

Based on my analysis, I think that the actual FY 2023 EBITDA margins for both the Refrigerated Retail business and the company as a whole should be in the 17%-18% range closer to pre-COVID levels.

Bottom Line

I am rating Post Holdings’ stock as a Buy. My opinion is that POST will deliver positive surprises such as a FY 2023 EBITDA beat and accretive M&A deals, which will drive the company’s share price upwards.