UPDATE: BMO Capital Cuts Post Holdings (POST) to 'Market Perform' on Near-Term Concerns for Michael's Egg Business
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(Updated - September 21, 2016 8:52 AM EDT)
BMO Capital downgraded Post Holdings (NYSE: POST) from Outperform to Market Perform with a price target of $83.00 (from $90.00). Analyst Kenneth B. Zaslow said he has a more cautious view on the near-term earnings power of the Michael’s egg business.
Zaslow explained, "Our case for investing in POST is less persuasive as its stock price has increased more than 65% since February 2015 (outperforming the S&P by 6,200 basis points and the majority of its food peers), while the normalization of Michael’s egg business presents a fairly large unknown. We would not be surprised if Michael’s egg profits moderated by more than $50 million next year and did not return to F2016 levels (which included 2.5 quarters of substantially elevated AI margins) for the foreseeable future. The combination of the contraction of the AI premium and the conversion back to grain-based contracts from market-based contracts likely will pressure its egg margin structure to more normalized levels in F2017."
The analyst added, "We continue to believe that POST’s outlook excluding Michael’s remains conservative with potential upside given 1) the lapping of its $25 million investment in marketing and cost-cutting initiatives last year; and 2) the acceleration in both Active Nutrition and cereal synergies. Furthermore, we maintain our view that Michael’s EBITDA margin likely will remain above pre-AI levels in F2017, reflecting: 1) improved mix away from lower-margin ingredient/shell eggs; 2) AI pricing escalators in forward pricing contracts (albeit these will be lower than the pricing escalators that were in place during AI as previously mentioned); 3) the gradual shift towards higher-margin value-added cage-free egg products; and 4) potential efficiency improvements through the acquisition of National Pasteurized Eggs."
Shares of Post Holdings closed at $78.42 yesterday.
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