Price correction allows Post Holdings upgrade for FY2018

by Josh Sosland
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Post management has raised its earnings guidance for the full 2018 fiscal year and Vertical group has raised its earnings estimates both for fiscal 2018 and 2019. 
 
RICHMOND, VA. — Taking advantage of a price dip Feb. 2, the Vertical Group has upgraded its investment recommendation for Post Holdings Inc. to a buy from a hold and raised its price target to $87 per share from $85.

In trading on the New York Stock Exchange Feb. 2, Post shares closed at $74.35, down $3.32 per share, or 4.3 percent, from the Feb. 1 close. It was the lowest closing price for Post shares since October 2016. The dip occurred the same day Post announced first-quarter financial results as well as the day the overall stock market sustained a severe decline that capped the market’s worst weekly performance in two years.

Brett
Brett Hundley, an analyst with Vertical Group

To Brett Hundley, an analyst with Vertical Group, the price decline for Post Holdings represents an attractive buying opportunity. While the overall market weakness was prompted in part by fears of an overheating US economy and the prospect of higher interest rates, Hundley noted that 84 percent of Post Holdings’ debt is fixed rate, “adding protection against rising rates.”

He said investors appear worried by conditions at two Post segments — Post Consumer Brands (intensifying competition) and Michael Foods (prospects for weaker profitability later in the year).

“The truth is that none of this should be a surprise or unexpected,” he said. “As this reaction and concerns over rising rates subside, we think you are left with an organic sales/earnings growth story, growing synergies, and the potential for value-creating capital market actions. We dock the company on valuation for its leverage profile, but still find attractive upside in the shares.”

He noted that Post management has raised its earnings guidance for the full 2018 fiscal year and that Vertical has raised its earnings estimates both for fiscal 2018 and 2019. He characterized Vertical Group as “now all-in” on Post and the packaged foods sector.

“We’re now buy-rated on every packaged food company in our coverage,” he said. “We like the potential for upside across food, given a discounted relative valuation, the potential for large-scale consolidation knock-on effects, and its positioning as a defensive vertical in declining equity markets.” 



 

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