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TreeHouse Upgraded to Strong Buy on Flagstone Acquisition

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Zacks Investment Research upgraded TreeHouse Foods, Inc. (THS - Free Report) to a Zacks Rank #1 (Strong Buy) on Jul 2, after the food manufacturer agreed to acquire Flagstone Foods -- a Minneapolis-based maker of healthy snacks.

Why the Upgrade?

On Jul 1, TreeHouse announced that it will buy Flagstone Foods from Gryphon Investors and other shareholders for $860 million cash in order to expand in the rapidly growing $7.1 billon healthy snacks category.

Flagstone Foods is one of the largest manufacturers and distributors of private label healthy snacks in North America and leads the trail mix and dried fruit categories. TreeHouse, on the other hand, makes non-dairy powdered creamers and sweeteners, specialty teas, cereals, macaroni, cheese and other items.

The deal will thus be a strategic fit for TreeHouse as it will position the company as a private label leader in the snacks sector, which is one of the fastest growing categories in the food industry.

TreeHouse expects the deal to add approximately 5 to 8 cents to 2014 earnings. Also, it will raise its annual revenue by $750 million and add 24-28 cents to earnings per share in the first year after the deal closes.

The deal is expected to close during the third quarter of 2014. TreeHouse is expected to finance the deal using a combination of borrowings under its existing credit facility and a $325 million equity issuance.

IL-based TreeHouse is on an acquisition spree and has expanded into new categories and markets in order to diversify its private label offerings. In fact, it has acquired around six food companies in the past four years.

In May 2014, the company acquired Protenergy Natural Foods for approximately $150 million (170 million Canadian dollars). Protenergy Natural Foods is an industry leading developer and manufacturer of premium quality food and beverage products. The acquisition added items such as soups, broths, and gravies to TreeHouse's product portfolio.

These acquisitions have played an important role in pulling up the revenues of the company. In the first quarter of 2014, revenues grew 14.6%, driven by acquisitions of Cains Foods and Associated Brands made last year. Likewise, we expect the Flagstone acquisition to improve TreeHouse's performance going forward.

Investors interested in the food industry can also consider stocks like Mondelez International, Inc. (MDLZ - Free Report) , The Hain Celestial Group, Inc. (HAIN - Free Report) and McCormick & Co., Inc. (MKC - Free Report) . All of them hold a Zacks Rank #2 (Buy).

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