After hearing from the companies gathered last month in Florida for the

Consumer Analyst Group of New York's

annual meeting,

Merrill Lynch's

food team came back to New York and upgraded just one stock:

Ralcorp

(RAH)

.

While other food companies rolled out new products -- anyone for

Cap'n Crunch

that turns the milk green? -- Ralcorp explained how it intends to maintain its pole position in the private-label market, one segment of the food industry that nearly everyone thinks will outpace the overall market.

Though Merrill's Eric Katzman raised Ralcorp's investment risk rating to high from above average, reflecting its 100% exposure to the volatility in the private-label business, he also upgraded the stock to a long-term buy and intermediate-term accumulate from long-term accumulate and intermediate-term neutral and raised his earnings estimates. Investors say that as supermarkets consolidate and build up their private-label offerings, Ralcorp is adding to its stronghold on the private-label cereal market, where it has a 55% share, and venturing into new product lines.

"Their strategy is the same whether it's cold cereal or any other product: Take existing products and replicate them at prices of 20% to 30% lower," says Katzman. (Merrill hasn't performed underwriting for Ralcorp.)

You may not have heard of Ralcorp's brands, but if you buy store brands, you've probably eaten them. Spun off from

Ralston Purina

(RAL)

in 1994, Ralcorp sold its branded-cereal business, which included the

Chex

and

Cookie Crisp

brands and its

Beech Nut

baby-food unit, and focused on private-label cereal. At the same time, it has diversified its business with acquisitions like cracker-maker

Wortz

, cookie company

Sugar Kake

and nut makers

Nutcracker Brands

and

Flavor House

. Cereal now accounts for about half its sales, with 33% from cookies and crackers and the rest from nuts. Last month, it added

Martin Gillet

, a private-label mayo and salad-dressing manufacturer with annual sales of about $70 million.

With the exception of

Ry-Krisp

crackers, Ralcorp's food businesses are now all private label all the time; the only remaining nonfood business is a 22% stake in

Vail Resorts

(MTN) - Get Report

. Analysts surveyed by

First Call

expect Ralcorp to earn $1.20 per share in 1999 and $1.37 in 2000. Trading at 20 a share, that puts Ralcorp's P/E based on the 1999 consensus at about 17, compared with about 22 for its industry.

Private-label food products had weighted average market share of about 19% over the past year, says

J.P. Morgan

. That's a much lower penetration rate than in Europe and Canada. U.K. supermarket giant

Sainsbury's

, for example, says its own brands account for 40% of its products. Foreign retailers "have long realized that an effectively positioned store-brand line that offers consumers high quality at a cost savings to national brands can help distinguish one retail operation from another, at the same time offering the retailer greater profit returns," said Joe Micheletto, Ralcorp's president and CEO, in his speech to the Consumer Analyst Group conference.

The U.S. is heading the same way, with supermarkets consolidating and other mass-merchandise stores like

Wal-Mart

(WMT) - Get Report

getting into the food business and building their own brands to get customer loyalty. A 1998 survey by the

Private Label Manufacturers Association

found that retailers project an average 24% growth in private-label unit sales over the next three years, while suppliers estimated growth at 10%. Moreover, these are not the generic products that used to be the butt of supermarket jokes.

"We're out of the mode of plain white boxes with ugly print," says Barbara Goodstein, an analyst with

Rothschild

, which hasn't done underwriting for Ralcorp. She rates the company a long-term buy and has a price target of 23.

"The smart thing about Ralcorp is they've been ahead of people saying that," says a buy-side analyst with a firm that owns Ralcorp shares. "They're building up this big private-label food company without anyone knowing." Ralcorp deals with all the major grocery retailers, including Wal-Mart.

And big retailers don't want to deal with a hodgepodge of suppliers. "A lot of smaller family-run companies have to make a decision: Put capital into their business or sell," says Katzman at Merrill. Ralcorp, which is essentially debt-free, is well-positioned to snap up those companies. And its stake in Vail Resorts could be sold to fund acquisitions, the company says.

Future acquisitions will probably be outside the cereal business, which has been rocked by lower demand and price competition among the big branded players like

Kellogg

(K) - Get Report

and

General Mills

(GIS) - Get Report

. After major brands raised prices, private labels bounced back, but the biggies are still spending a lot on promotions and other marketing to the trade.

"Grain-based products are No. 1 on the list ... but we've got a hit list, and we'll look at as many things as possible," says Dan Zoellner, Ralcorp's director of financial information and investor relations.

Analysts say the company is choosing well. "They make smart acquisitions, and they don't overpay," says the buy-side analyst. "They're going to look carefully at areas where private labels can get meaningful market share."

It's also moving away from more standard products like saltine-style and graham crackers toward higher-margin products and emulations of popular branded cereals.

So where's the risk? The potential for continued cereal wars, for one, or a sharp increase in commodity costs. And Vail Resorts has suffered from a lack of snow, sending its shares down 22% this year.

Most of the peril in Ralcorp comes from the traditional notions of store brands. "The risks are that whenever you're in the private-label business, you're a market follower, not a leader, and you're vulnerable to price promotions and cuts of major manufacturers," says Goodstein at Rothschild.

But as retailers consolidate and continue to build loyalty with their own brands, Ralcorp may look less and less like a market follower and more like a leader -- even without the help of cereals that turn the milk green.