Ralcorp Ready to Feed the Stretched Consumer

Food companies offering costs savings are a good place to be in tough times. Consumers will be eating at home more and looking to stretch their dollars. Ralcorp Holdings (RAH - commentary - Cramer's Take) is a food manufacturer that has been building a strong product portfolio over the last 10 years. Ralcorp is a leading private-label or "store brand" producer of low-cost proprietary products for grocers in cereals, crackers, snack nuts and other food products. Ralcorp is well positioned to benefit from a likely acceleration of consumer preferences to low-cost, high-quality proprietary brands.

Ralcorp was created in 1994 when Ralston Purina spun off its consumer food brand businesses. After an initial selloff of a number of brands, the company has continued to grow by both organic growth and acquisitions. Ralcorp is currently organized into four business units: cereals, crackers and cookies; frozen bakery products; dressings, syrups, jellies and sauces; and snack nuts and candy.

Ralcorp has been active in acquisitions and has continued to assemble the "right" brand mix in its portfolio. The company currently has a variety of brands including Ralston Foods, Bloomfield Bakers, Carriage House, Bremner and Medallion. In August of this year, Ralston completed the acquisition of the Post cereals business from Kraft Foods (KFT - commentary - Cramer's Take). Post is the third-largest manufacturer of branded ready-to-eat cereal in the U.S., with brands such as Honey Bunches of Oats, Pebbles, Post Selects, Spoon Size Shredded Wheat, Grape-Nuts and Post Raisin Bran. The acquisition gives Ralcorp a leading position in the U.S. ready-to-eat and hot cereal market, and it includes both premium and value brands.

Ralcorp has assembled a strong track record. Over the last four years, the company has achieved a compound annual growth rate of over 16% for revenue and 25% for earnings per share, with a substantial amount of the growth coming from acquisitions. Given the size and scope of the Post acquisition and the current state of the capital markets, I would not expect much activity on the M&A front from Ralcorp in 2009. Yet I believe that the company may be in front of an environment of accelerating sales in private-label products, which may produce additional growth.

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At the time of publication, Gear had no positions in stocks mentioned.

Steve Gear was director of capital markets at Stockhouse.