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TreeHouse (THS) Up 6.9% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for TreeHouse Foods (THS - Free Report) . Shares have added about 6.9% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is TreeHouse due for a pullback? 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 catalysts.

TreeHouse Foods Q3 Earnings Beat Estimates, Sales Lag

TreeHouse Foods posted third-quarter 2020 results, wherein the bottom line beat the Zacks Consensus Estimate while sales lagged the same. Further, the company revised its financial guidance for 2020 and issued fourth-quarter view. Adjusted earnings from continuing operations amounted to 71 cents per share that surpassed the Zacks Consensus Estimate of 61 cents. Further, the bottom line advanced 29% year over year.

Net sales of $1,045.7 million came below the consensus mark of $1,066 million and declined 1.1% year over year. Organic sales grew 0.7% 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, better pricing efforts, particularly in the Snacking & Beverages segment, contributed to quarterly growth.

Gross margin came in at 18%, expanding 40 basis points (bps) from the year-ago quarter’s figure. This was mainly driven by improved channel mix of greater retail business and reduced operational expenses, which more than offset higher costs incurred in connection with the pandemic, like higher production shifts, increased sanitization measures, supplemental payments and protective equipment. In fact, adjusted gross margin expanded 160 bps to 19.7%, thanks to higher volumes and lower fixed costs.

Total operating expenses, as a percentage of sales, dropped 8.7 percentage points to 14.2%, on the back of gains from hedging activities and favorable currency movements. However, adjusted EBITDA from continuing operations rose 16.3% to $131 million on reduced operational expenses and improved channel mix, partially countered by higher employee costs and other COVID-19-related costs.

Segment Details

Meal Preparation: During the quarter, sales in the segment fell 2.1% year over year to $642.7 million. This can be attributable to adverse volume/mix, primarily stemming from distribution losses and lower food-away-from-home demand. Also, negative pricing actions marred the Single Serve Beverages unit. Direct operating income (DOI) margin in the segment declined 1.6 percentage points as labor shortages and warehouse expansion costs in a bid to fulfill COVID-19-induced demand acted as deterrents.

Snacking & Beverages: Net sales rose 0.5% to $403 million on improved volume/mix, increased pricing efforts and innovation, which compensated for distribution losses and adverse mix associated with divestitures. DOI margin rose 6 percentage points owing to productivity gains led by pandemic-induced demand along with better pricing and reduced operation costs.

Other Updates & Guidance

The company concluded the quarter with cash and cash equivalents of $365.1 million, long-term debt (excluding operating lease liabilities) of $2,201.5 million and total shareholders’ equity of $1,827.3 million. In the first nine months of 2020, cash provided by operating activities of continuing operations amounted to $124.5 million.

Management remains encouraged with its operations amid the pandemic-led burgeoning demand. The company remains optimistic about its prospects for the private-label space and sustained momentum for at-home food consumption. Encouragingly, it updated its 2020 sales view and issued a fourth-quarter guidance.

For 2020, net sales are now anticipated to be $4.2-$4.4 billion compared with its previously guided range of $4.10-$4.40 billion. Adjusted earnings from continuing operations are expected to be $2.65-$2.75 per share compared with $2.55-$2.75 forecasted earlier. Also, it foresees adjusted EBITDA in the range of $490-$510 million. Net sales for the fourth quarter of 2020 are expected in a band of $1.11-$1.17 billion. Adjusted EBITDA from continuing operations is anticipated in a band of $140-$160 million. Further, management expects adjusted earnings from continuing operations of $1-$1.1 per share.

TreeHouse has inked a definitive deal to acquire most of Ebro-owned Riviana Foods’ portfolio for $242.5 million in cash. This move is likely to contribute 20-30 cents in the first year post the completion of the deal. Further, regional brands, including Skinner, No Yolks, American Beauty, Creamette, San Giorgio, Prince and Light 'n Fluffy, Mrs. Weiss, Wacky Mac, P&R Procino-Rossi and New Mill, will be added to the company’s existing portfolio. That said, the deal is subjected to customary closing conditions and estimated to be concluded by the fourth quarter of 2020.

How Have Estimates Been Moving Since Then?

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

VGM Scores

At this time, TreeHouse has a subpar Growth Score of D, a grade with the same score on the momentum front. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. 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 indicates a downward shift. Notably, TreeHouse has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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