Credit Suisse downgrades Ralcorp on Post acquisition

by Eric Schroeder
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NEW YORK — Saying the acquisition of the Post cereal business "has not played out particularly well," Credit Suisse on Oct. 9 downgraded its rating of Ralcorp Holdings Inc. to "neutral" from "outperform."

As part of the downgrade, Credit Suisse has dropped its share price and earnings targets for Ralcorp. The revised share price target was $64 per share, down from the previous target of $75 and compared with a close of $59 just before the downgrade.

Credit Suisse has lowered its Ralcorp earnings per share target for fiscal year 2009 (ending Sept. 30) to $4.45 from $4.48 and for fiscal 2010 to $4.75 from $5.10. Earnings in fiscal 2008 were $3.65.

"We believe the company will need to make a significant investment in promotional spending on Post to regain the market share it lost this year to aggressive competitors," said Robert Moskow of Credit Suisse. "Over the past 12 weeks, Post’s market share is now at 11.2%, down 260 basis points compared to a year ago. To make matters more challenging, we find that the growth rate of private label food in general is slowing as the economic shock that drove consumer trials has now faded."

Ralcorp acquired the Post ready-to-eat cereal business from Kraft Foods Inc. in August 2008 in a $2.6 billion transaction that Ralcorp executives said represented a "transformational" move for the company.

Mr. Moskow said that while profitability is under pressure, the Ralcorp share price was low enough to diminish the likely downside.

"However, we can’t justify supporting our rating until we get more comfort that management has accurately diagnosed the problems that Post is facing and has developed a compelling strategy for solving them," he said.

Over the long term, solutions will be found, he said.

"This is a good management team that has run into a rough patch in its first major foray into branded foods," he said. "We have faith that it will get the picture on Post eventually. But the communication of this plan with investors is going to be very important. It remains to be seen whether this historically reticent management will see the light."

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