Treehouse Outperforms Despite Suboptimal Environment; Shares Undervalued, but Tread Carefully

No-moat Treehouse Foods reported solid first-quarter results, with adjusted earnings per share of $0.36, ahead of the $0.31 FactSet consensus and only a slight dip from last year’s $0.37. While first-quarter 2021 revenue decreased to $1.057 billion from $1.085 billion in 2020, management reiterated that March 2020 saw unprecedented pantry stocking, which accounted for a $66 million bump in the year-ago quarter. Despite lower volume, the adjusted EDITDA margin expanded 10 basis points to 10%, due partially to improved manufacturing efficiencies. The company reaffirmed its full-year guidance of $4.4 billion-$4.6 billion in revenue, with earnings per share between $2.80 and $3.30 (roughly in line with our $2.95 estimate). As a result, we don’t anticipate making any material changes to our $57 fair value estimate. While we view shares as undervalued, we’d still implore prospective investors to tread carefully. The involvement of activist investor Jana Partners (which caused a significant positive rerating of the shares earlier in 2021) notwithstanding, we believe shares could remain under pressure in the near term. Due to the commoditized nature of many of its products, navigating the industry’s pronounced commodity inflation could be more difficult for Treehouse relative to branded peers.