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Post (NYSE:POST) Q1 Sales Beat Estimates


Full Report / February 01, 2024

Packaged foods company Post (NYSE:POST) reported Q1 FY2024 results topping analysts' expectations, with revenue up 25.5% year on year to $1.97 billion. It made a non-GAAP profit of $1.69 per share, improving from its profit of $1.08 per share in the same quarter last year.

Post (POST) Q1 FY2024 Highlights:

  • Revenue: $1.97 billion vs analyst estimates of $1.92 billion (2.4% beat)
  • EPS (non-GAAP): $1.69 vs analyst estimates of $1.10 (53.4% beat)
  • Free Cash Flow of $174.4 million, similar to the previous quarter
  • Gross Margin (GAAP): 29.1%, up from 26.5% in the same quarter last year
  • Sales Volumes were down 3.6% year on year
  • Market Capitalization: $5.62 billion

Founded in 1895, Post (NYSE:POST) is a packaged food company known for its namesake breakfast cereal as well as protein bars, shakes, and other healthier-for-you snacks.

Within the Post cereal umbrella, brands such as Honey Bunches of Oats, Grape-Nuts, Pebbles, and Shredded Wheat have made the company a mainstay in the cereal category. Premier Protein (bars, shakes, powders), PowerBar (sports nutrition), Weetabix, Bob Evans Farms, and Peter Pan Peanut Butter are other popular brands in the Post portfolio. The company has even expanded into quality pet food.

Post’s core customer is an individual or family seeking convenient and nutritious packaged food. The company therefore shapes its branding and messaging to speak to those who are health-conscious or who lead active lifestyles that prioritize nutrition. On Post’s website, the brand portfolio is introduced with “Tasty and delicious. Wholesome and nutritious. We’ve got food brands the whole family will love.”

Post’s brands and products can be found in a wide range of stores and retailers, with major grocery stores and supermarkets being the main channels. Additionally, convenience stores, health food stores, and online food retailers also carry Post products. Wide distribution and prominent shelf placement over time have cemented Post as a bellwether staples company and leader in breakfast cereals.

Packaged Food

As America industrialized and moved away from an agricultural economy, people faced more demands on their time. Packaged foods emerged as a solution offering convenience to the evolving American family, whether it be canned goods, prepared meals, or snacks. Today, Americans seek brands that are high in quality, reliable, and reasonably priced. Furthermore, there's a growing emphasis on health-conscious and sustainable food options. Packaged food stocks are considered resilient investments. People always need to eat, so these companies can enjoy consistent demand as long as they stay on top of changing consumer preferences.The industry spans from multinational corporations to smaller specialized firms and is subject to food safety and labeling regulations.

Competitors in the packaged food space and specifically in breakfast cereals include General Mills (NYSE:GIS), Kellogg (NYSE:K), and Kraft Heinz (NASDAQ:KHC).

Sales Growth

Post is one of the larger consumer staples companies and benefits from a well-known brand, giving it customer mindshare and influence over purchasing decisions.

As you can see below, the company's annualized revenue growth rate of 9% over the last three years was decent for a consumer staples business.

Post Total Revenue

This quarter, Post reported remarkable year-on-year revenue growth of 25.5%, and its $1.97 billion in revenue topped Wall Street estimates by 2.4%. Looking ahead, Wall Street expects sales to grow 9.3% over the next 12 months, a deceleration from this quarter.

Gross Margin & Pricing Power

We prefer higher gross margins because they make it easier to generate more operating profits.

Post's gross profit margin came in at 29.1% this quarter, up 2.6 percentage points year on year. That means for every $1 in revenue, a chunky $0.71 went towards paying for raw materials, production of goods, and distribution expenses. Post Gross Margin (GAAP)

Post has subpar unit economics for a consumer staples company, making it difficult to invest in areas such as marketing and talent to grow its brand. As you can see above, it's averaged a 26.5% gross margin over the last two years. Its margin, however, has been trending up over the last 12 months, averaging 8% year-on-year increases each quarter. If this trend continues, it could suggest a less competitive environment.

Operating Margin

Operating margin is an important measure of profitability accounting for key expenses such as marketing and advertising, IT systems, wages, and other administrative costs.

In Q1, Post generated an operating profit margin of 10.6%, in line with the same quarter last year. This indicates the company's costs have been relatively stable.

Post Operating Margin (GAAP)

Zooming out, Post has done a decent job managing its expenses over the last eight quarters. The company has produced an average operating margin of 9.1%, higher than the broader consumer staples sector. On top of that, its margin has risen by 1.1 percentage points on average over the last year, showing the company is improving its fundamentals.

The company's operating profitability was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes tectonic shifts to move meaningfully. Companies have more control over their operating margins, and it signals strength if they're high when gross margins are low (like for Post).

EPS

Earnings growth is a critical metric to track, but for long-term shareholders, earnings per share (EPS) is more telling because it accounts for dilution and share repurchases.

In Q1, Post reported EPS at $1.69, up from $1.08 in the same quarter a year ago. This print beat Wall Street's estimates by 53.4%.

Post EPS (Adjusted)

Between FY2021 and FY2024, Post's EPS grew 172%, translating into an astounding 39.7% compounded annual growth rate. This growth is materially higher than its revenue growth over the same period, showing that Post has excelled in managing its expenses.

Over the next 12 months, however, Wall Street is projecting an average 13.7% year-on-year decline in EPS.

Cash Is King

If you've followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills.

Post's free cash flow came in at $174.4 million in Q1, up 279% year on year. This result represents a 8.9% margin.

Post Free Cash Flow Margin

Over the last eight quarters, Post has shown mediocre cash profitability, putting it in a pinch as it gives the company limited opportunities to reinvest, pay down debt, or return capital to shareholders. Its free cash flow margin has averaged 4.8%, subpar for a consumer staples business. However, its margin has averaged year-on-year increases of 5.7 percentage points over the last 12 months. Continued momentum should improve its cash flow prospects.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company's revenue growth was profitable. But was it capital-efficient? If two companies had equal growth, we’d prefer the one with lower reinvestment requirements.

Enter ROIC, a metric showing how much operating profit a company generates relative to its invested capital (debt and equity). ROIC not only gauges the ability to grow profits but also a management team's ability to allocate limited resources.

Post's five-year average ROIC was 6.1%, somewhat low compared to the best consumer staples companies that consistently pump out 20%+. Its returns suggest it historically did a subpar job investing in profitable growth initiatives.

The trend in its ROIC, however, is often what surprises the market and drives the stock price. Unfortunately, over the last two years, Post's ROIC has averaged a 2.3 percentage point decrease each year. In conjunction with its already low returns, these declines are a red flag and suggest the company's profitable investment opportunities are fewer than in the past.

Key Takeaways from Post's Q1 Results

We were impressed by how significantly Post blew past analysts' gross margin, operating profit, EBITDA, and EPS expectations this quarter. Its revenue growth also topped estimates, driven by strong top-line performance in its Post Consumer segment ($989 million of revenue vs consensus estimates of $905 million), which consists of ready-to-eat (“RTE”) cereal, pet food, and peanut butter. The company also raised its full-year 2024 EBITDA guidance to $1,315 million at the midpoint and announced a new $400 million share repurchase authorization, putting a stamp on a fantastic "beat-and-raise" quarter. Shareholders should be satisfied. The stock is up 4.8% after reporting and currently trades at $98.33 per share.

Is Now The Time?

Post may have had a good quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We cheer for all companies serving consumers, but in the case of Post, we'll be cheering from the sidelines. Although its revenue growth has been decent over the last three years and its growth over the next 12 months is expected to accelerate, its projected EPS for the next year is lacking. And while its average annual EPS growth over the last three years has been fantastic, the downside is its shrinking sales volumes suggest it'll need to change its strategy to succeed.

Post's price-to-earnings ratio based on the next 12 months is 18.3x. While the price is reasonable and there are some things to like about Post, we think there are better opportunities elsewhere in the market right now.

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