{"id":20888,"date":"2023-06-10T10:28:35","date_gmt":"2023-06-10T14:28:35","guid":{"rendered":"https:\/\/ifintechworld.com\/investing\/this-company-makes-costco-and-amazons-store-brands-its-stock-is-a-buy\/"},"modified":"2023-06-10T10:28:36","modified_gmt":"2023-06-10T14:28:36","slug":"this-company-makes-costco-and-amazons-store-brands-its-stock-is-a-buy","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=20888","title":{"rendered":"This Company Makes Costco and Amazon\u2019s Store Brands. Its Stock Is a Buy."},"content":{"rendered":"

Inflation has taken a bite out of budgets, and that\u2019s particularly true at the grocery store, as everyday essentials from cereal to sugar have shot up in price. That sticker shock provides motivation for strapped consumers to eschew their favorite brands for less-expensive generics\u2014often made by
\n TreeHouse Foods.<\/span>\n <\/p>\n

\n

TreeHouse (ticker: THS) is the only major publicly traded pure play on private-label food products, an area that was expanding before the pandemic and has since been turbocharged by price increases, economic unease, and stores\u2019 desire to sell exclusive products. That hasn\u2019t helped the stock, which, due in part to high costs and supply-chain problems, has climbed just 3.3% over the past three years, even as the S&P 500 gained 39%.<\/p>\n

The TreeHouse of today\u2014a major vendor to retailers including
\n Costco Wholesale
\n (COST),
\n Walmart
\n (WMT),
\n Amazon.com
\n (AMZN), Aldi, and Trader Joe\u2019s\u2014looks far different than it did just 10 months ago. A combination of management changes and asset sales has left it leaner and more focused on what it does best\u2014creating great products for companies looking to boost their sales of off-label food products. And it\u2019s why JANA Partners is still bullish on the company\u2019s ability to capitalize on its strengths two years after first it took a stake in the company. <\/p>\n

\u201cTreeHouse is one of the only ways to invest [in] two of the most powerful underlying megatrends in food,\u201d says Scott Ostfeld, a managing partner and portfolio co-manager at JANA who sits on TreeHouse\u2019s board of directors. \u201cThe first is the focus on expanding private-label store brands at the expense of national brands by large American retailers, as penetration of store brands is well below that in other countries. And second is the search for value and affordability by consumers.\u201d<\/p>\n

It hasn\u2019t been easy for TreeHouse to get to this point. The company has struggled as rapid commodity inflation squeezed already razor-thin margins and supply-chain woes hurt operations. In addition, it was burdened with poor acquisition integration\u2014mistakes are bound to happen with a company that was built from dozens of deals\u2014and an underperforming meal-preparation business that included products like pastas and syrups. That division accounted for some 60% of sales in recent years, but its low margins and operational problems meant earnings growth wasn\u2019t consistent.<\/p>\n

\u201cIt has been a very long and difficult road, but after restructuring, it\u2019s finally well positioned,\u201d says Benjamin Nahum, a portfolio manager at the Neuberger Berman Intrinsic Value fund, which has owned the shares since 2017. \u201cTreeHouse has been tested, and it has come out a leaner, more profitable company.\u201d<\/p>\n

The bigger change might have been the sale of its meal-prep unit to a private-equity firm for $950 million\u2014or a juicy 14 times earnings before interest, taxes, depreciation, and amortization. That\u2019s a higher multiple than the stock, at 11.8 times, currently commands. The move shored up TreeHouse\u2019s balance sheet and left it with a promising snack and beverage portfolio. Analysts now expect the company\u2019s earnings per share to more than double in 2023, to $2.62, on a nearly 7% climb in revenue.<\/p>\n

\u201cWe think it was a great deal, full stop,\u201d says Nahum. \u201cIt was a great transaction that simplified the company.\u201d Ostfeld agrees. \u201cTreeHouse is now a higher-growth, higher-margin company that should trade at a premium to where it has historically traded,\u201d he says.<\/p>\n

That hasn\u2019t happened yet. TreeHouse stock trades for 17.5 times forward earnings, below its five-year average of 18.7 and that of peers like
\n Post Holdings
\n (POST), at 19.4 times. Even a better-than-expected earnings report last month couldn\u2019t boost the stock, as downbeat second-quarter sales guidance, probably the result of supply-chain improvements that moved orders from the second quarter into the first, weighed on shares. \u201cThis was a great start to the year for TreeHouse, [which] included private-label growth surpassing 2019 levels,\u201d writes Truist Securities analyst Bill Chappell, who has a $60 price target on the stock, up 20% from Friday\u2019s close of $49.84. <\/p>\n

The next leg up could come on TreeHouse\u2019s investor day on June 13. CEO Steve Oakland says the company plans to provide investors with a \u201cdeeper understanding\u201d of its strategy and its improved capital structure\u2014which allowed it to purchase
\n Farmer Bros.
\n \u2019 (FARM) coffee-processing facility and shipping business for $100 million, announced this past week. <\/p>\n

The move comes at a time when retailers are clamoring to enhance their brands with high-quality private-label products. While consumers may once have looked askance at these no-name options, much of the stigma surrounding them is gone, thanks to cult favorites like Costco\u2019s Kirkland brand and offerings from Trader Joe\u2019s.
\n Target
\n (TGT) and Amazon have also been steadily building their own brands that are less subject to competition and price comparison.<\/p>\n

The biggest risk might be that cooling inflation and lower prices could lead to fewer consumers trading down. Still, it\u2019s unlikely that major food deflation will occur, particularly as national brands look to protect their margins, given higher packaging and transport costs. Meanwhile, consumers still face higher bills for things like shelter and child care than a few years ago. <\/p>\n

And if the economy does continue to weaken, TreeHouse would probably benefit, as well. \u201cAt the very least, TreeHouse is a place to hide in an uncertain market,\u201d says Chris Terry, portfolio manager at Hodges Capital, which owns the shares.<\/p>\n

Talk about comfort food. <\/p>\n

Write to <\/strong>Teresa Rivas at teresa.rivas@barrons.com<\/p>\n<\/p><\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Inflation has taken a bite out of budgets, and that\u2019s particularly true at the grocery store, as everyday essentials from cereal to sugar have shot up in price. That sticker shock provides motivation for strapped consumers to eschew their favorite brands for less-expensive generics\u2014often made by TreeHouse Foods. TreeHouse (ticker: THS) is the only major […]<\/p>\n","protected":false},"author":1,"featured_media":20889,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"video","meta":{"footnotes":""},"categories":[239],"tags":[83],"class_list":["post-20888","post","type-post","status-publish","format-video","has-post-thumbnail","hentry","category-investing","tag-featured","post_format-post-format-video"],"yoast_head":"\nThis Company Makes Costco and Amazon\u2019s Store Brands. 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