NEW YORK ( TheStreet) -- Post Holdings (POST) didn't just beat but obliterated last quarter's earnings estimates, and the largely overlooked reason for the strong results bodes well for competitors Kellogg (K) and General Mills (GIS) .
In its fiscal fourth quarter ending in September, Post posted per-share, non-GAAP income of 13 cents versus estimates of only 7 cents. That doesn't compare favorably to the 2013 fourth quarter of 16 cents per share, but the market was duly impressed by the positive impact the acquisition of Michael Foods had on the top and bottom line.
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Michael Foods drove $534.3 million of the $1.043 billion Post reported in revenue for last quarter, in its first full quarter under the Post Holdings umbrella. Michael Foods also contributed nearly $30 million to the company's quarterly operating profit of $86.8 million. Post shares are currently down over 17% for the year to date.
The benefit of the acquisition is a one-time event. Does Post Holdings have any sort of an encore in store, aside from more acquisitions? It just might thanks to a significant dip in the price of corn.
That dip shows up in the company's fourth quarter filing. Post Foods, which makes the company's famous cereal brands, had a modest decrease in year-over-year sales but a modest increase in profit. Sales for Post Foods fell from $253.9 million a year ago to $248.5 million this time around, yet the division's contribution to total gross profits grew from $47.8 million in the fourth quarter of 2013 to $50.3 million in the fourth quarter of 2014.
The key to the corporation's ability to do more with less? The lower price of corn.
As of the end of the calendar third quarter corn was priced at roughly $3.30 per bushel. At the time it was a multi-year low price for corn, and well under the peak price of $8.43 hit in 2012, when a combination of floods and droughts crimped U.S. corn production to a level that was 13% weaker than 2011's corn production.
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Two years ago few would have ever thought corn would be priced at less than half its panic-driven price in 2012. Farmers responded firmly the following year and, as a result, ended up growing more surplus corn than they had in years. Specifically, according to agricultural information Web site AgManager, 2014's total U.S. corn supply is at a record-breaking 15.6 billion bushels. For perspective, in 2012 the nation's corn supply fell to a multi-year low of 12 billion bushels.
The benefit to companies like General Mills, Kellogg and Post is lower input prices; when supply goes up and demand remains steady, corn prices fall. They did, to multi-year lows of $3.18 per bushel in mid-October. Although the price of corn has since bounced back to $3.75 per bushel, the cost of this key ingredient to food companies -- and cereal manufacturers in particular -- is poised to remain low for the foreseeable future now the supply is strong and farms are willing and able to grow an abundance of it.
Kellogg won't report quarterly earnings until late January and General Mills will post its quarterly results in mid-December. Analysts expect flat to weaker results from both companies, and to be fair, neither company has been especially impressive on terms of their recent bottom lines.
General Mills has fallen short of estimates in each of its past four consecutive quarters, and though Kellogg has seen tepid growth and managed to top estimates in two out of three quarters for the year so far, excessive input costs are withering away for these and other food companies that use corn and other food commodities. Don't be surprised to see more earnings beats from this oft-overlooked group in the near future.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
TheStreet Ratings team rates POST HOLDINGS INC as a Sell with a ratings score of D+. TheStreet Ratings Team has this to say about their recommendation:
"We rate POST HOLDINGS INC (POST) a SELL. This is driven by several weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its deteriorating net income, disappointing return on equity, poor profit margins, generally high debt management risk and generally disappointing historical performance in the stock itself."
You can view the full analysis from the report here: POST Ratings Report