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Treehouse Foods - Conference Notes

September 16, 2011 | About:
The Science of Hitting

The Science of Hitting

Treehouse Foods (THS), an industry leader in private label foods, presented at the Barclay’s Back to School Conference last Thursday. I started following the company after an informative by Deloitte called “The Battle for Brands in a World of Private Labels” that was released in November 2010. At the time, their research showed that “only 22% of participating consumer product executives agreed or strongly agreed that a majority of the consumers who switched to store brands in recent years will switch back to national brands.” Treehouse has capitalized on the shift towards private label brands: Since 2005, when the company was started, revenue and earnings per share have increased at a compounded annual rate of 21% and 25%, respectively, which tripled the size of the business; in the past five years, the stock is up nearly 140%.

That was enough to grab my attention, and I have been following the company ever since. Here are some of the highlights and notes from the conference, where CEO Sam Reed and CFO Dennis Riordan took the stage:

The private label food and beverage business is a highly fragmented $92 billion plus sector, which is driving strategic changes in food retailing. As CFO Dennis Riordan noted in a previous conference, retailers generate roughly 20% higher gross profits on private label, and have a clear incentive to drive their continued success; as a result, an estimated 98% of retailers promote private label brands as part of their value proposition to customers.

Management holds 7% of the outstanding shares, a positive sign for long term investors who look for their interests to be aligned with those of the decision makers.

While the company originally started in pickles and non-dairy creamer, they have used their free cash flow to fund acquisitions over the past six years. Today, the company is highly diversified, with a portfolio that includes soup, hot cereal, and salad dressings, among others.

For the year, management expects more than $2 billion in sales, compared to $1.817 billion in 2010 (12-13% growth). EPS estimates for 2011 are $2.90-$3.00, suggesting 4-8% earnings per share growth for the year over the $2.78 earned in fiscal 2010 (largely held back by capital investments in the rollout of SAP and capacity expansion).

Going back more than 20 years, there has been an increase (albeit small) in private label market share. In 1990, private label held 13.7% market share. In 2000, that had increased to 15.7%. By 2010, the share of private label brand sales had increased to 19.1% of the market (up 200 basis points since 2006), with estimates for the trend to continue looking forward (estimates call for 23% share by 2014, equal to $113 billion in food and beverage sales). According to Symphony IRI data from July, 75% of households now purchase store brands, covering more than 30 categories.

Treehouse still faces a lot of the same factors that branded companies do; for example, their gross margin in the second quarter of this year fell 160 basis points due to increased costs and inability to take necessary pricing, resulting in a net income decline to $14 million from $21 million in 2010. Overall, the valuation is a bit rich for me at this point, but I’m keeping my eye on THS.

About the author:

The Science of Hitting
I'm a value investor, with a focus on patience; I look to buy great companies that are suffering from short term issues, and hope to load up when these opportunities present themselves. As this would suggest, I run a fairly concentrated portfolio by most standards, usually with 8-10 names; from the perspective of a businessman rather than a market participant / stock trader, I believe this is more than sufficient diversification.

I hope to own a collection of great businesses; to ever sell one, I would demand a substantial premium to the average market valuation due to what I believe are the understated benefits to the long term investor of superior fundamentals and time on intrinsic value. I don't have a target when I purchase a stock; my goal is to replicate the underlying returns of the business in question - which if I've done my job properly, should be very attractive over many years.

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