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Post Is Anything but a Bargain

Stocks in this article: POST GIS K KRFT

As it turns out, however, the spinoff has helped both companies. With Post shares now trading at around $50, the stock is up 86% since the January 2012 spinoff price of $26.89. With such strong gains following the company's recent $370 million deal for Dakota Growers Pasta, the Street has clearly bought in to the belief that management can turnaround what has been a fledging business, given Dakota's strong share in the pasta market.

The way I see it, though, with this $370 million deal -- which now raises Posts net debt position to $800 million -- the Street is placing too high of a bet at this current valuation. Again, as we've looked back over the past three-plus years and it's not as if management has a history of strong execution.

I'm not saying this deal won't work. I just don't believe that Dakota, even with its $5 billion market cap and leadership position in private label retail, materially changes Post's long-term growth outlook. Although the deal is expected to add $300 million in net revenue, I can't get excited about non-organic growth - not for a company that just reported 67% decline in net earnings for the first nine months of the year.

Investors will read this and accuse me of being overly bearish. But I don't believe I've been unfair. There are a lot of growth expectations that has been priced into this stock. But any company can put up gaudy growth numbers through acquisitions. The question, though, is how much of Post's fundamentals (good or bad) is the Street ignoring by slapping the stock with a P/E of 166?

Now I do realize that the spun-off company still has plenty to prove. Even so, I see very little upside potential and plenty of downside risk for an over-leveraged company that is aggressively entering new markets, while being led by a management team that has been at best substandard.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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