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Post Holdings Downgraded to Strong Sell

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Zacks Investment Research downgraded Post Holdings Inc (POST - Free Report) to a Zacks Rank #5 (Strong Sell) on Sep 18. Disappointing fiscal third quarter 2013 results and increasing debt burden led to the downgrade.

Why the Downgrade?

On Aug 7, Post Holdings reported dismal third quarter of fiscal 2013 (ending Jun 30, 2013) results. Excluding the acquisition of Premier Nutrition Corp, sales increased only 1.9% in the quarter. Lower average selling prices led to soft results. Earnings of 29 cents per share declined 43% year over year due to decline in margins and increased selling, general and administration (SG&A) costs. Earnings also missed the Zacks Consensus Estimate by 14.7%.

Adjusted gross profit declined 3.2% to $106.5 million, while gross margin plummeted 220 basis points to 43.2% in the reported quarter. The decline was due to a shift to lower margin products and higher trade spending.

Excluding the acquired businesses, SG&A expense ratio increased 190 basis points to 28.8%. The increase in SG&A costs was the result of incremental holding company costs and increased advertising costs compared to the year-ago period.

Though the acquisition of nutrition company­­­ Premier Nutrition Corp has added to the company’s food and beverage products under the Premier Protein and Joint Juice brands, it has also raised the company’s debt-burden. The company’s interest expense increased 19.3% in the third quarter.

Most recently, on Sep 16, Post Holdings agreed to acquire Dakota Growers Pasta Company, Inc., a leading North American pasta maker for $370 million. The acquisition will be funded by a combination of cash on hand and up to $200 million in committed debt financing.

Post Holdings ended the third quarter of fiscal 2013 with $243.6 million in cash and equivalents. The company operates with $1.04 billion in total debt, for a net debt position of around $800 million. While the company is on an acquisition spree and expanding its portfolio in the food industry, we believe it is also adding to its debt. Moreover, the company doesn’t pay dividends to its shareholders, which restricts investment in the company.

This food company witnessed sharp downward estimate revisions after announcing its third quarter fiscal 2013 results. All the estimates for fiscal 2013 and fiscal 2014 declined over the past 60 days. The Zacks Consensus Estimate for fiscal 2013 decreased 11.1% and that for fiscal 2014 went down 9.2% over the last 60 days.

Other Stocks to Consider

Not all stocks are performing as poorly as Post Holdings. Food companies that are worth considering include Green Mountain Coffee Roasters Inc , Pinnacle Foods Inc and Dole Food Co. Inc . While Green Mountain and Pinnacle Foods hold a Zacks Rank #1 (Strong Buy), Dole Food has a Zacks Rank #2 (Buy).

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