No-Moat Treehouse Foods Releases Tepid Financial Results; Shares Remain Appetizing for Investors

No-moat Treehouse Foods failed to impress after releasing mixed results for its third quarter. Sales for the quarter registered $1.1 billion, tracking our full-year revenue forecast of $4.34 billion. Revenue growth was 5.3% (1.7% on an organic basis) compared with last year, which is mainly driven by the 3% price increase on much of the portfolio. The price hikes were instituted to counteract worse-than-expected inflation, as management noted that higher input prices now pose a roughly $230 million hit to annual gross profits from $105 million previously (to a 54-basis-point hit from 24). This pressure led to a gross margin of only 16.3%, which pales in comparison with 18% in same period last year and our full-year estimate of 18.2%. Management implemented additional price increases that should reach 5% by year-end, and normally we would be skeptical that the firm (which we consider no-moat, and thus no brand loyalty or pricing power) could successfully pull this off. However, as inflation is widespread, with most players raising prices, we contend that management will be successful in this endeavor.