Buy, Sell, or Hold This Cereal Up and Comer: A SWOT Analysis

Post Holdings , manufacturer of such beloved brands as Alpha-Bits, Shredded Wheat, Pebbles, and Honey Bunches of Oats, has been branching out into crunchy granola territory with several acquisitions. With major changes ahead a SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis is timely.

Strengths

• Mario Gabelli, head of Gabelli Funds and an investor who made big money on takeover candidates, said of Post CEO Bill Stiritz, "I also like to buy an individual that is a gifted CEO." presenting his case on CNBC in July that Post is a likely takeover target.Stiritz has 33 years of food industry C-suite experience as CEO of Ralcorp, which spun off Post in February 2012. Before that he was CEO of Ralston Purina. One hates to gush but former food industry analyst John McMillin lauded Stiritz, "He's probably among the best moneymakers of the past 30 years. He's right up there with former Nabisco and Gillette Chief Executive Jim Kilts and Colgate's Reuben Mark.

• The company has made three significant acquisitions this year. Normally an ambitious move for a newly debuted small-cap company these three expand their portfolio of health-oriented brands. Attune Foods came with two natural cereals: Uncle Sam and Erewhon and probiotic chocolate bars. Hearthside Food Solutions at $158 million was a major coup giving Post a 135,000 square foot manufacturing plant and a 30,000 square foot warehouse for lease, another four natural cereal brands and private label granolas. Premium Nutrition for $180 million in cash provides Post with a line of protein powders, drinks, and bars and their Joint Juice line of nutritional supplements.

• Attune Foods will now be considered as a second operating segment integrating the two newest purchases and will hold all of Post's portfolio of organic, non-GMO, gluten-free health-focused cereals, probiotics, and protein drinks. Collectively, the three purchases are expected to add $215-225 million to net sales: $15 million from Attune Foods, $70 million from Hearthside, and $130-140 million from Premier Nutrition.

• Post Foods, will hold all their legacy brands including: Honeycomb, Post Toasties, Grape Nuts, and Great Grains. These are well known, well loved brands familiar to American and Canadian families. Ex-acquisitions, Post is the third largest US cereal company with 10.6% market share as reported by Nielsen in the third quarter.

• The company has a lean workforce of 1400 employees.These acquisitions will be run by their current management and labor force with only minimal back-office help as needed. Also, the company switched from the broker-based sales model under Ralcorp to a direct sales force which as it stated in its annual report more closely aligns the company's interest with its sales team.

• Post currently has $7.45 in cash per share and the company expects $400 million cash on hand once the Premier purchase closes in late September.

Weaknesses

• Acquisition and restructuring costs hit first half EPS, declining from $0.77 in the year ago period to $0.16. Third quarter EPS of $0.29 also disappointed by three cents. Accretion and synergistic cost savings aren't far down the road, though, in my opinion.

• The company manufactured the first cereal as we know it in 1890 and its longevity also means some of the legacy brands are old-fashioned and possibly past their sell-by date (not literally). Gabelli also said,"Cereal was around in 1890, so I don't have to guess about whether the next Netflix will be here."

• The company does not pay a dividend, unlike General Mills that pays at a yield of 3.10% and Kellogg at 2.90%. Instead, it has chosen to keep cash available for paying down debt, strategic acquisitions and support in the form of promotion and advertising to stay competitive. The company also chooses to buy back shares as it did last September buying 5% of its stock with $53 million cash on hand.

Opportunities

• Speaking to the last point, the company has been tweaking legacy brands adding Greek yogurt to Honey Bunches of Oats (delicious!) and doubling the protein and fiber content of some cereals.

• By 2014 some Grape-Nuts and Great Grains varieties will be non-GMO. More legacy brands could go non-GMO until Post is the only major cereal company totally non-GMO. That would be a strong customer incentive to buy Post instead of Big G and special K.

• It's not all grim grains and fiber. The company announced a Poppin' Pebbles (explodes in your mouth) debut soon and testing has trended favorably.

Threats

• Kellogg and General Mills are the main threats. Kellogg disappointed on second quarter revenue and reported US Morning Food sales (cereals) down 3.3%. General Mills was downgraded by Jefferies to Underperform for not enough ad spend so the struggle for shelf space will only become more competitive. As President and COO Block said on the third quarter conference call, "This is a category where competition battles over tenths of a share point." (source Seeking Alpha transcript)"

• Both Kellogg and General Mills are global companies whereas Post only distributes in the US and Canada with no immediate plans to expand internationally.

• According to a recent Business Week article Americans are eating less cereal at breakfast, if they sit down to breakfast at all. COO Block also noted the ready-to-eat cereal category is challenged, "as measured by Nielsen, that was down, in dollars, 2.6% for the same 3-month time period."(again Seeking Alpha). Both Kellogg and General Mills have been expanding breakfast options with more cereal and protein bars to address this issue.

• With an extra six cereal brands to support, Post could see more promotional expense ahead. However, that purchase of Premier Nutrition works well as the trend toward supplementing with more protein was noted on the third quarter conference call.

• Kellogg and General Mills are not the only cereal companies out there, Pepsico has been expanding cold and hot cereal and breakfast bar brands in Quaker and B&G Foods has a line of hot cereals.

• Increasing commodity costs, particularly of fruit and grain, are a concern with CFO Robert Vitale adding they were offset in the third quarter by lower cost sugar and nuts. This along with competitive price decreases were responsible for a 170 basis points gross margin contraction to 43.1%.

The Foolish takeaway
Post cereals may be a takeover target as Gabelli says or the newest health food company around. No matter, it has a great CEO, soon to be accretive acquisitions, and is fighting hard for those tenths of share. I think they may just win some, so buy on pullbacks.

The article Buy, Sell, or Hold This Cereal Up and Comer: A SWOT Analysis originally appeared on Fool.com.

AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.