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Post Holdings – A Classic Case of Spin-off

February 20, 2012 | About:
Spin-offs are often great places to look at as value is often created from the underpricing of the business being spun off.

The most recent example is the spin-off of Post Holdings from its parent, Ralcorp Holdings. Post is the maker of branded cereals while Ralcorp basically does private-brand food products. A classic example of spin-off whereby the 2 businesses target different consumer segments.

As Post is more of a premium product player, they are more sensitive towards market conditions. Existing shareholders of Ralcorp would dump the shares of Post after spin-off in view of today’s recessionary-like environment. In addition, the newly spun-off Post would not be covered by most analysts and it would take a while before their value get realized.

Post was spun off at $26.89 and went down to $25.51 the next day. We managed to buy in at the cost price of $25.54, and now the stock is trading at $31.02! That's a nice return of almost 21%! Nothing to cheer about though, as we could have bought more but did not as we succumbed to being greedy and hoping the price would go down more. The good news is even at current price, Post is still a great buy.

The current enterprise value of Post at a stock price of $31.02 is about $2B. Ralcorp bought Post from Kraft a few years back at a price of $2.6B, that’s a difference of almost $600M. Of course, it might not be a fair comparison as they might have overpaid. But take a look at the numbers:

2009 2010 2011
Operating Profit 215.2 190.8 -305.6
Impairment 19.4 503.5
Adj. OP 215.2 210.2 197.9
Interest Expense 58.30 51.50 71.16
156.90 158.70 126.74
After Tax 101.99 103.16 82.38
EPS 2.96 2.99 2.39
Ave. EPS 2.78
Current P/E 11.17


After adjusting for goodwill impairment, their average EPS is about $2.78, which translates to a PE of about 11.17. As compared to the other cereal makers, they are trading at the lowest valuation for a consumer franchise business, which we believe, should be valued at a higher PE.

Kellog General Mills
P/E 14.7 15.8
Valuation 40.84 43.89
Upside Potential 32% 41%
Margin of safety 24% 29%


At current price level, there is an upside of almost 32% to 41% if they move up to the valuation of their competitors. Furthermore, their earnings are depressed in the current environment.

Take a look also at their price to book ratio compared to the rest.

Post Kellog General Mills
P/B 0.81 10.2 3.6


Post is currently trading below their book value. They should be at least valued at price to book of 1 for a company that is still churning out positive cash flows. Adjusted EBITDA of $275M and $256M for 2010 and 2011 respectively.

Long Post Holdings.

http://valueground.blogspot.com/

About the author:

Valueground
We are a 2 partners team managing a concentrated portfolio, with the intention to hold our investments for as long as the fundamentals stay intact. We do not chase, nor wish to participate in the short-term race for returns, choosing instead for the best opportunities to invest in. The time we do so is the time we invest big, taking outsized stakes in what we call the “misguided & misunderstood” investments. Contrary to many, we subscribe to the notion of low risk, high return.

Visit Valueground's Website


Rating: 2.8/5 (13 votes)

Comments

Adib Motiwala
Adib Motiwala - 2 years ago
Can you compare the balance sheets of the three companies or rather post EV/EBIT multiples.

thanks
tonyg34
Tonyg34 - 2 years ago
@ Adib

you can look that up on your own you know

Please leave your comment:


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