by Inflation has taken a bite out of budgets, especially the grocery store, as everyday essentials, from cereal to sugar, have risen in price. That sticker shock motivates strapped consumers to eschew their favorite brands for cheaper generics — often made by
TreeHouse Food
.
TreeHouse (ticker: THS) is the only major publicly traded pure play on private-label food products, an area that expanded before the pandemic and has since been boosted by price hikes, economic turmoil and stores’ desire to sell exclusive products. That hasn’t helped the stock, which has risen just 3.3% over the past three years, in part due to high costs and supply chain issues, while the S&P 500 gained 39%.
Today’s TreeHouse – a major supplier to retailers including
Costco wholesale
(COST),
walmart
(WMT),
Amazon.nl
(AMZN), Aldi and Trader Joe’s – looks very different from just 10 months ago. A combination of management changes and asset sales has left the company leaner and more focused on what it does best: making great products for companies looking to boost sales of off-label nutritional products. And that’s why JANA Partners is still optimistic about the company’s ability to capitalize on its strengths two years after it first took a stake in the company.
“TreeHouse is one of the few ways to invest [in] two of the most powerful underlying food megatrends,” said Scott Ostfeld, a managing partner and portfolio co-manager at JANA, who serves on TreeHouse’s board of directors. “The first is the focus on expanding private label store brands at the expense of national brands by major US retailers, as store brand penetration is far below that in other countries. And second, there is the consumer’s search for value and affordability.”
It hasn’t been easy for TreeHouse to get to this point. The company has struggled as rapid commodity inflation squeezed already thin margins and supply chain issues hurt operations. In addition, it suffered from poor acquisition integration – mistakes are inevitable in a business built from dozens of deals – and an underperforming meal-prep company with products such as pastes and syrups. That division has accounted for about 60% of turnover in recent years, but profit growth has been inconsistent due to low margins and operational problems.
“It has been a very long and difficult road, but after restructuring it is finally well positioned,” said Benjamin Nahum, portfolio manager at the Neuberger Berman Intrinsic Value fund, which has owned the shares since 2017. “TreeHouse has been tested, and it has become a leaner, more profitable company.”
The bigger change could be the sale of the meal-prep unit to a private equity firm for $950 million – or a juicy 14 times earnings before interest, taxes, depreciation and amortization. That’s a higher multiple than stock, at 11.8 times, currently commands. The move strengthened TreeHouse’s balance sheet and left behind a promising snack and beverage portfolio. Analysts now expect the company’s earnings per share to more than double to $2.62 in 2023, on a nearly 7% increase in revenue.
“We think it was a lot, period,” says Nahum. “It was a great transaction that simplified the business.” Ostfeld agrees. “TreeHouse is now a higher growth, higher margin company that should be trading at a higher price than where it has been trading in the past,” he says.
That hasn’t happened yet. TreeHouse shares are trading at 17.5 times future earnings, below the five-year moving average of 18.7 and that of industry peers such as
Mail Holdings
(POST), at 19.4 times. Even a better-than-expected earnings report last month failed to boost the stock as the gloomy second-quarter sales outlook, likely the result of supply chain improvements that shifted orders from Q2 to Q1, weighed on the stock. “This has been a great start to the year for TreeHouse, [which] including private-label growth that surpasses 2019 levels,” writes Truist Securities analyst Bill Chappell, who has a $60 price target for the stock, up 20% from Friday’s closing price of $49.84.
The next step could come at TreeHouse’s investor day on June 13. CEO Steve Oakland says the company plans to give investors a “deeper understanding” of its strategy and improved capital structure, helping it
Farmer Bros.
(FARM) coffee processing facility and shipping company for $100 million, announced last week.
The move comes at a time when retailers are clamoring to bolster their brands with premium private label products. While consumers once viewed these unnamed options with suspicion, much of the stigma surrounding them has disappeared, thanks to cult favorites like Costco’s Kirkland brand and Trader Joe’s offerings.
Goal
(TGT) and Amazon are also steadily building their own brands that are less subject to competition and price comparison.
The biggest risk could be that cooling inflation and lower prices could lead to fewer consumers trading in. Still, major food deflation is unlikely to happen, especially as national brands look to protect their margins given higher packaging and transportation costs. Meanwhile, consumers are still facing higher bills for things like daycare and childcare than they were a few years ago.
And if the economy continues to weaken, TreeHouse would likely benefit as well. “TreeHouse is, at the very least, a place to hide in an uncertain market,” said Chris Terry, portfolio manager at Hodges Capital, which owns the stock.
Talk about comfort food.
Write to Teresa Rivas at teresa.rivas@barrons.com
