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TreeHouse (THS) Down 3% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for TreeHouse Foods (THS - Free Report) . Shares have lost about 3% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is TreeHouse due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

TreeHouse Foods Perks Up Guidance on Q2 Earnings Beat

TreeHouse Foods released strong second-quarter 2020 results, wherein both top and bottom lines advanced year over year and the latter beat the Zacks Consensus Estimate. The company’s retail business catered well to the unexpected rise in demand amid the coronavirus pandemic, which compensated for softness in the food-away-from-home business and distribution losses. Encouraged by a solid performance, the company raised its financial guidance for 2020.

Adjusted earnings from continuing operations amounted to 58 cents per share that surpassed the Zacks Consensus Estimate of 47 cents. Further, the bottom line grew 45% year over year on the back of better operational performance, as the company continued to cater to the burgeoning demand amid the pandemic.

Net sales of $1,041.9 million came below the consensus mark of $1,069 million, while it advanced 1.6% year over year. Organic sales grew 3.7% owing to higher volume/mix, backed by elevated retail demand due to the pandemic, which countered distribution loss impacts and weak demand in the food-away-from-home channel. Also, adverse pricing, divestiture of two in-store Bakery facilities and currency woes partly hurt organic sales. Notably, organic sales improved in both Meal Preparation and Snacking & Beverages segments.

Gross margin came in at 18.4%, down 10 basis points (bps) from the year-ago quarter’s figure. This was accountable to higher costs incurred in connection with the pandemic, like higher production shifts, increased sanitization measures, supplemental payments and protective equipment. This was partly compensated by improved channel mix of greater retail business along with elevated throughput at the company’s production and distribution centers. In fact, adjusted gross margin expanded 120 bps to 20.1%, thanks to productivity gains across manufacturing and distribution facilities.

Total operating expenses, as a percentage of sales, dropped 3.3 percentage points to 15.9%, courtesy of reduced restructuring costs and SG&A control measures, somewhat negated by elevated employee costs. However, adjusted EBITDA from continuing operations rose 13.1% to $119.2 million on productivity gains and improved channel mix, partially countered by higher employee costs.

Segment Details

Meal Preparation: During the quarter, sales in the segment climbed 1.6% year over year to $657.5 million. The upside was backed by improved volumes/mix, primarily stemming from the coronavirus-led increase in retail demand, which compensated for distribution losses and lower food-away-from-home demand. This was partially mitigated by currency woes. Direct operating income (DOI) margin in the segment rose 1.6 percentage points on better channel mix and a decline in SG&A expenses.

Snacking & Beverages: Net sales rose 1.7% to $367.8 million on improved volumes/mix, courtesy of the coronavirus-led increase in retail demand, which compensated for distribution losses and adverse mix associated with divestitures. Also, adverse pricing and currency woes were deterrents. DOI margin rose 1.5 percentage points due to productivity gains led by pandemic-induced demand.

Other Financial Updates & Guidance

The company concluded the quarter with cash and cash equivalents of $293.9 million, long-term debt (excluding operating lease liabilities) of $2,086.6 million and total shareholders’ equity of $1,803.7 million. In the first six months of 2020, cash provided by operating activities of continuing operations amounted to $123.3 million.

Management remains encouraged with its operations amid the pandemic-led burgeoning demand. Also, the company is impressed with its restructuring and reorganization actions, which helped it perform well even amid the crisis. The company remains optimistic about its prospects for the private label space and expects revenues to remain strong in the remainder of 2020. It also expects high costs associated with COVID-19-related safety measures. 

All said, the company raised its guidance for 2020. Revenues are now expected to be toward the upper end of its previously guided range of $4.10-$4.40 billion. The company delivered net sales of $4288.9 million (nearly $4.29 billion) in 2019. For 2020, management now expects adjusted earnings from continuing operations of $2.55-$2.75 per share compared with $2.40-$2.65 forecasted earlier. The company recorded EPS of $2.39 in 2019.

Net sales for the third quarter of 2020 are expected in a band of $1.04-$1.08 billion, nearly flat (on a year-over-year basis) at the midpoint. Organic sales are likely to rise 2%. Adjusted EBITDA from continuing operations is anticipated in a band of $112-$127 million, suggesting almost a 6% increase at the midpoint. Further, management expects adjusted earnings from continuing operations of 55-65 cents, suggesting a roughly 9% increase at the midpoint.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month.

VGM Scores

Currently, TreeHouse has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions has been net zero. Notably, TreeHouse has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.


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