Spin-offs are often great places to look at as value is
often created from the underpricing of the business being spun off.
The most recent example is the spin-off of Post Holdings
from its parent, Ralcorp Holdings. Post is the maker of branded cereals while
Ralcorp basically does private-brand food products. A classic example of
spin-off whereby the 2 businesses target different consumer segments.
As Post is more of a premium product player, they are more
sensitive towards market conditions. Existing shareholders of Ralcorp would
dump the shares of Post after spin-off in view of today’s recessionary-like
environment. In addition, the newly spun-off Post would not be covered by most
analysts and it would take a while before their value get realized.
Post was spun off at $26.89 and went down to $25.51 the next
day. We managed to buy in at the cost price of $25.54, and now the stock is
trading at $31.02! That's a nice return of almost 21%! Nothing to cheer about
though, as we could have bought more but did not as we succumbed to being
greedy and hoping the price would go down more. The good news is even at
current price, Post is still a great buy.
The current enterprise value of Post at a stock price of
$31.02 is about $2B. Ralcorp bought Post from Kraft a few years back at a price
of $2.6B, that’s a difference of almost $600M. Of course, it might not be a
fair comparison as they might have overpaid. But take a look at the numbers:
2009
|
2010
|
2011
|
|
Operating Profit
|
215.2
|
190.8
|
-305.6
|
Impairment
|
19.4
|
503.5
|
|
Adj. OP
|
215.2
|
210.2
|
197.9
|
Interest Expense
|
58.30
|
51.50
|
71.16
|
156.90
|
158.70
|
126.74
|
|
After Tax
|
101.99
|
103.16
|
82.38
|
EPS
|
2.96
|
2.99
|
2.39
|
Ave. EPS
|
2.78
|
||
Current P/E
|
11.17
|
After adjusting for goodwill impairment, their average EPS
is about $2.78, which translates to a PE of about 11.17. As compared to the
other cereal makers, they are trading at the lowest valuation for a consumer
franchise business, which we believe, should be valued at a higher PE.
Kellog
|
General Mills
|
|
P/E
|
14.7
|
15.8
|
Valuation
|
40.84
|
43.89
|
Upside Potential
|
32%
|
41%
|
Margin of safety
|
24%
|
29%
|
At current price level, there is an upside of almost 32% to
41% if they move up to the valuation of their competitors. Furthermore, their
earnings are depressed in the current environment.
Take a look also at their price to book ratio compared to
the rest.
Post
|
Kellog
|
General Mills
|
|
P/B
|
0.81
|
10.2
|
3.6
|
Post is currently trading below their book value. They
should be at least valued at price to book of 1 for a company that is still
churning out positive cash flows. Adjusted EBITDA of $275M and $256M for 2010
and 2011 respectively.
Long Post Holdings.
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