Company Reports

We’re reinitiating coverage of private-label food producer TreeHouse Foods, with a fair value estimate of $34 per share and a no-moat rating. Our valuation implies about 7.5 times enterprise value/adjusted EBITDA and 33 times price/adjusted earnings off our 2024 estimates. We think shares are fairly valued. For packaged-food exposure, narrow-moat General Mills looks undervalued, at a 13% discount to our valuation.

Private-label manufacturers can offer customers lower prices by minimizing the marketing and product spending that most packaged-food companies rely on to create strong brands. Secular trends create tailwinds for growth, but preferences for private label differ greatly by category. Since Steve Oakland took over as CEO in 2018, TreeHouse has slimmed its portfolio. We think this strategy makes sense, as TreeHouse is now more focused on categories where growth and private-label penetration are higher, including snacking, beverages and drink mixes, and aseptic goods. This is reflected in our mid-single-digit top-line growth forecast that exceeds most CPG companies we cover, but we think low operating margins are unlikely to improve given the lack of a moat.

We are dropping coverage of Treehouse Foods. We provide broad coverage of more than 1,500 companies globally and periodically adjust our coverage according to investor interest and staffing.

Despite being the largest pure-play private-label food manufacturer in the U.S., TreeHouse’s performance has historically been stymied by poor execution, including lackluster service levels and disjointed go-to-market efforts. Still, revamped leadership, strategy, and recent activist involvement have mostly remedied internal issues, and we believe private label should continue to ascend, supported by secular trends across the U.S. retail and demographic landscape, once pandemic disruption subsides. While we expect the windfalls from this rise to accrue disproportionately to retailers (who function as brand owners in this context), we think TreeHouse now has the right commercial and operational infrastructure in place to capture its fair share of growth and profitability.

While we expected a migration back to private label (at the expense of branded fare driven by inflation), this development seemed to surprise the broader market, with shares of no-moat Treehouse Foods trading up by a midteens rate after its first-quarter earnings report. Treehouse stands to be a beneficiary of the inflationary environment, with private label unit shares now above prepandemic levels (per IRI). In this context, Treehouse reported net sales growth of 7.9%, with an 11.7% increase from pricing partially offset by a 3.7% decrease from volume/mix. While additional pricing actions are slated for the third quarter, we do not expect price hikes to dampen demand, given elevated price levels and a higher-than-historical price gap between national and private brands that should continue in upcoming quarters. Against this backdrop, labor and supply chain constraints continue to temper Treehouse’s ability to service demand fully, with the current service level hovering around 90%, lower than its 98.5% target. This factor, along with commodity and freight inflation, pressured margins in the quarter, with a 460-basis-point downdraft in the adjusted EBITDA margin (to 5%). However, we think management is pulling the proper levers by securing backup ingredient suppliers and seeking reformulation efforts with customers to alleviate these challenges, and we suspect service levels will improve in the back half of the year as supply issues abate.

No-moat Treehouse Foods gave an update on its strategic review process, announcing that management is no longer pursuing an outright sale of the company, as it has determined that the current market environment is not conducive to a transaction. We agree, as we contend that a proper valuation would be difficult to garner considering the headwinds surrounding the company, headlined by the change in consumer preference away from private label toward branded products, which has been in place since the onset of the pandemic. Further, private-label brands do not carry brand equity, underpinning our no-moat rating for Treehouse. This lack of brand affinity has made it difficult for the company to pass through inflation to the consumer, as its 2021 gross margin declined to 16.1% from 18.4% in 2020.

Despite being the largest pure-play private-label food manufacturer in the U.S., Treehouse’s performance has historically been stymied by poor execution, including lackluster service levels and disjointed go-to-market efforts. Still, revamped leadership, strategy, and recent activist involvement have mostly remedied internal issues, and we believe private label should continue to ascend, supported by secular trends across the U.S. retail and demographic landscape, once pandemic disruption subsides. While we expect the windfalls from this rise to accrue disproportionately to retailers (who function as brand owners in this context), we think Treehouse now has the right commercial and operational infrastructure in place to capture its fair share of growth and profitability.

No-moat Treehouse Foods continues to experience numerous challenges, including consumers’ shift away from private-label (although we view this as temporary, pandemic-related phenomenon), widespread inflation, and supply chain disruption. We plan a mid-single-digit percentage reduction to our $53 fair value estimate, as we adjust our credit risk assessment to above average from moderate, as the firm’s net debt/adjusted EBITDA spiked to 4.2 times at year-end. While this is uncomfortably close to the 4.5 times limit imposed by its lending covenants, we are pleased that management has negotiated an amendment with its lenders, which should be finalized Feb. 14. We increase our cost of debt assumption for Treehouse by 150 basis points to 8.0%, taking our weighted average cost of capital estimate to 7.0% from 6.4%. This adjustment more than offsets the 5% boost to Treehouse’s intrinsic value from the reversal of our prior assumption that the U.S. corporate tax rate will increase in 2022. Despite an 8% pop in the stock on the report, shares appear undervalued, trading at a 25% discount to our revised valuation.

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.

Despite being the largest pure-play private-label food manufacturer in the U.S., Treehouse’s performance has historically been stymied by poor execution, including lackluster service levels and disjointed go-to-market efforts. Still, revamped leadership, strategy, and recent activist involvement have mostly remedied internal issues, and we believe private label should continue to ascend, supported by secular trends across the U.S. retail and demographic landscape. While we expect the windfalls from this rise to accrue disproportionately to retailers (who function as brand owners in this context), we think Treehouse now has the right commercial and operational infrastructure in place to capture its fair share of growth and profitability.

Despite being the largest pure-play private-label manufacturer in the U.S., Treehouse’s performance has historically been stymied by poor execution, including lackluster service levels and disjointed go-to-market efforts. Still, revamped leadership, strategy, and recent activist involvement have mostly remedied internal issues, and we believe private label should continue to ascend, supported by secular trends across the U.S. retail and demographic landscape. While we expect the windfalls from this rise to accrue disproportionately to retailers (who function as brand owners in this context), we think Treehouse now has the right commercial and operational infrastructure in place to capture its fair share of growth and profitability.

For most of 2021, shares of no-moat Treehouse have been besieged by uncertainty surrounding the competitive positioning of its business (and the private-label category more broadly) against the backdrop of the recent acute inflation. As such, we suspect there was quite a bit of concern heading into its second-quarter earnings, with investors eager to see how the firm’s initiatives across commercial, production, and logistics functions were helping it navigate treacherous terrain.

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.

Despite being the largest pure-play private-label manufacturer in the U.S., Treehouse’s performance has historically been stymied by poor execution, including lackluster service levels and disjointed go-to-market efforts. Still, revamped leadership, strategy, and recent activist involvement have mostly remedied internal issues, and we believe private label should continue to ascend, supported by secular trends across the U.S. retail and demographic landscape. While we expect the windfalls from this rise to accrue disproportionately to retailers (who function as brand owners in this context), we think Treehouse now has the right commercial and operational infrastructure in place to capture its fair share of growth and profitability.

The backdrop heading into no-moat TreeHouse’s fourth-quarter earnings was fraught to say the least. With Jana Partners, an activist investor, announcing a 7.5% stake less than 24 hours prior, and revealing plans to nominate board members and compel the firm to explore strategic options (including an outright sale), shares were up over 20%, reaching their highest levels in months. Ultimately, the results were commendable (ahead on revenue and in-line earnings relative to FactSet consensus), and the firm issued healthy guidance that implies recent strategic initiatives continue to bear fruit. Management has taken a nonadversarial approach to Jana’s overtures, vowing to engage in constructive dialogue and consider the activist’s proposals on their merits. We think this approach is prudent, and ultimately, consistent execution is the key to value creation for this kind of business, in our view. If Jana’s active stake fuels more urgency in this regard, then we have no qualms. Our $54 fair value estimate should not materially change beyond time value after rolling our model, and after the stock’s meaningful rally, we now see it as fairly valued.

Despite being the largest pure-play private-label manufacturer in the U.S., Treehouse’s performance has historically been stymied by poor execution, including lackluster service levels and disjointed go-to-market efforts. Still, revamped leadership and strategy have mostly remedied internal issues, and we believe private label should continue to ascend, supported by secular trends across the U.S. retail and demographic landscape. While we expect the windfalls from this rise to accrue disproportionately to retailers (who function as brand owners in this context), we think Treehouse now has the right commercial and operational infrastructure in place to capture its fair share of growth and profitability.

Shares of no-moat Treehouse continue to be besieged by uncertainty surrounding its competitive positioning and remnants of previous operational missteps. As such, heading into its third-quarter earnings print, we think investors were primarily looking for evidence of management’s ability to execute and generate cash amid a dynamic pandemic environment. We view the results, which were in line with our expectations on the top and bottom lines, as encouraging, and a testament to the operational and commercial infrastructure that the new management team has built. Separately, the firm announced its intent to acquire most of Riviana Foods’ (a subsidiary of Ebro) branded pasta portfolio. We take a constructive view of the deal, as it aligns with the strategic direction in which management is looking to take its pasta business (and other center-of-store categories). Still, it shouldn’t have a material impact on our $54 fair value estimate, and the current risk/reward proposition in the shares is compelling to us.

We’re initiating coverage of Treehouse Foods, the largest private label (PL) consumer goods manufacturer in the U.S., with a no-moat rating. Functioning essentially as a contract manufacturer, we don’t believe it enjoys enough clout along the supply chain to support sustainable economic profit. Nevertheless, we believe there are several industry tailwinds that should return the firm to top-line growth, which, together with margin expansion facilitated by structural business changes after years of restructuring, underpin our $54 fair value estimate. At current trading levels, we see an adequate margin of safety in the shares for prospective investors.

Despite being the largest pure-play private label (PL) manufacturer in the U.S., Treehouse’s performance has historically been stymied by poor execution, including lackluster service levels and disjointed go-to-market efforts. Still, revamped leadership and strategy have mostly remedied internal issues, and we believe PL should continue to ascend, supported by secular trends across the U.S. retail and demographic landscape. While we expect the windfalls from this rise to accrue disproportionately to retailers (who function as brand owners in this context), we think Treehouse now has the right commercial and operational infrastructure in place to capture its fair share of growth and profitability.