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Post Is Anything but a Bargain

NEW YORK ( TheStreet) -- It seems odd to discuss an expensive stock in an industry such as packaged foods that has been ravaged by poor volumes and weak margins. But Post Holdings (POST - Get Report), whose stock is up 30% since October and now enjoys a P/E of 166, is hard to ignore.

I don't want to exaggerate the meaning of the P/E. But this isn't the tech sector where valuations are often ignored for future profits. Just to put things in more context, Post's valuation is seven times and eight times the valuation of market leaders Kellogg (K) and General Mills (GIS), respectively.

While it's true that Post has outperformed both Kellogg and General Mills in terms of revenue growth, this is also because Post is a much smaller company - one that operates (for better or worse) as an exciting startup following its 2012 spinoff from Ralcorp. But with only 10% of the ready-to-eat (RTE) cereal market, which trails both Kellogg and Post by roughly 20% each, I don't see the justification for this sort of optimism - not for a third-place company in a sector that is slowly fading.

I won't deny that Post, which Ralcorp acquired from what is now Kraft Foods (KRFT) in 2007, has some strong brands like Honey Bunches of Oats. And I will grant that management deserves credit for having maintained some decent volumes relative to the stale results in food industry. But that's the extent to which I could get excited about this valuation.

With Honey Bunches of Oats accounting for 40% of Post's RTE business, I don't believe the company is not as well diversified as its rivals. Quite frankly, I don't believe Ralcorp would have spun off this business if Ralcorp management was confident that Post can deliver the sort of growth necessary to boost long-term cash flow growth and earnings.

Truth be told, I had my doubts also because while under Ralcorp, Post delivered a collective 10% revenue decline over the past three-and-a-half years while management struggled to repair the company's underlying operational issues, which results in a 50% decline in operating income during that same span.

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