POST Chief Needs More Protein

Last week, we took a look at William Stiritz and how he produced a track record worthy of Outsiders fame. While many of the Outsiders are no longer among us or have been so successful as to be almost universally associated with investment acumen (we’re talking to you Warren Buffett), some continue to work their magic in relative obscurity.

Our Ralston Purina story, A Public LBO, concluded with the company’s sale to Nestle in 2001.  But the action didn’t stop there.  In 2007, Ralston Purina acquired Post Holdings from Kraft Foods and folded it into the Ralcorp division, which had a history in the branded cereal business. After Ralcorp itself was spun off from Ralston Purina in 2011, Post Foods was spun off by Ralcorp in early 2012. Enter Mr. Stiritz.

There is nothing sexy about breakfast cereal.  The business has been in secular decline for some time, although we believe the trend is more like a slow bleed than a death blow (it’s entirely possible that I am biased by recent experience watching Lucca pound a box of Cheerios per week).

Cereal

Despite Lucca’s growing appetite, Stiritz took the reins at Post with an eye toward the new trends shaping modern breakfast and began a rapid transformation of the company, guided by Buffett’s timeless advice:

“Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”

Stiritz identified changes taking place at the breakfast table. First and foremost is the shift towards higher protein diets (which coincidentally has been accompanied by new haircuts, popped collars, muscle milk and Jägerbombs).

The second factor transforming breakfast routines is increased mobility of families during the morning hours. Gone are the days where many families sit down for a quiet breakfast before skipping off to school. Families today are much more likely to grab a breakfast bar as they sprint out the door or slow down just enough to grab a McGriddle through the drive-through window on the way to the office.

Last but not least, a growing portion of consumers are moving to healthier options, including gluten-free, organic, and non-GMO foods.

Since the spin-off, Stiritz has moved quickly to position the company for these shifting dynamics through an aggressive acquisition program. POST has completed half a dozen deals in under two years, paying reasonable multiples of 8-10x cash flow and transforming the business from a stale cereal manufacturer to a diversified portfolio with a much improved organic growth profile.

Organic Growth

Starting with Attune Foods, an organic cereal marketer, Post’s acquisitions have addressed one or more of the underlying trends in the breakfast segment.  Among these acquisitions, Golden Boy Foods offers almond and other nut butters, Premier Protein offers protein shakes, and Dakota Growers produces organic private label pastas. So far, these brands have not contributed materially to performance but they generally occupy faster growing segments and serve as platforms for future acquisitions.

Post’s largest acquisition occurred earlier this year when it purchased Michael Foods, a value-added egg and potato product manufacturer, for $2.5 billion. The company has been owned by three successive private equity owners since 2000, demonstrating the company’s ability to generate consistent cash flows. More importantly, we believe the business opens doors for Stiritz via increased penetration into additional channels and broadening distribution capabilities.

POST’s buying spree has reduced the company’s exposure to its highly cash generative cereal business (which made up 100% of sales when the company came public). Michael Foods accelerated this process as new POST now generates nearly three-quarters of its revenue from more highly fragmented, faster growing segments of the market.

POST Portfolio

Stiritz has moved quickly to “change vessels” and looks poised to make further acquisitions after closing on the previously announced PowerBar acquisition this fall. His strategy is not without risk, as demonstrated last quarter. POST has employed leverage liberally to make acquisitions and as a result, a significant downturn in Post Cereals or Michael Foods could meaningfully limit management’s flexibility.

We have patiently waited and watched the stock’s levitation higher during the past year as investors continually bid up the Stiritiz Premium.   With the stock trading more than 40% below recent highs and at a discount to peers, investors can buy POST today and get Stiritz for free.  The company’s 2013 Annual Report illustrates the value in this option:

As our name implies, Post Holdings is a holding company for operating assets. For a holding company to add value, it must demonstrate to its stakeholders that ownership of operating assets through the holding corporation is a superior alternative to direct ownership of these assets. We add value by:

  • Identifying opportunities to invest in categories that are growing relatively faster than our core, but may lack independent scale (e.g. private label and active nutrition).
  • Acquiring or recruiting management teams capable of driving consolidation.
  • Maintaining Centers of Excellence that allow for enterprise wide resource sharing while not inhibiting the adaptive cultures that make each unit successful.
  • Utilizing strategic portfolio management rather than maximum synergistic efficiency.
  • Encouraging, enabling, and when warranted, rewarding appropriate risk taking.

Post Holdings competes for your capital allocation. To earn it we must deliver risk adjusted returns commensurate with your assessment of risk and your alternatives. Perhaps uniquely, we view Post as a hybrid of a traditional public company and a private equity fund. We use many of the same tools as a private equity company – relatively higher leverage, investment analysis and adaptive management. We also view our portfolio as dynamic, reacting to opportunities as they develop. However, unlike most private equity firms, we also provide Centers of Excellence to create competitive advantages for our operating companies. And we do this in the public forum allowing our investors greater transparency and, most importantly, the ability to act on their own accord.

As you can see, we are pretty excited about the shifts taking place at the breakfast table and just as excited to go along for the ride with Bill Stiritz.

Lucca Breakfast