NEW YORK — Equity research firm Vertical Group on June 27 lowered its recommendation for shares of Post Holdings and Lancaster Colony to “hold” from “buy.” A “hold” rating infers that a stock is believed to be trading within 10% upside or downside relative to Vertical Group’s fair value target while a “buy” rating is defined as a stock with 10% or more upside potential from its current price.
In the case of Post Holdings, Vertical Group said the St. Louis-based company’s stock has been trading in line with the firm’s $88 price target and appears to have built in any potential benefit related to a private brands sale or spin-off. Vertical Group said its rating’s action also takes into account rumors circulating that Post may be considering acquiring B&G Foods.
“We may prove early with our downgrade,” Brett Hundley, research analyst with Vertical Group, wrote in the report. “Most of our peers are positive on this name, with price targets in the mid-$90s+. Alongside such a favorable view, market sentiment has clearly shifted toward domestic small caps, with consumer staples garnering attention. This could support the Post shares further, beyond what we currently expect.”
The New York Post in a June 7 article suggested Post Holdings may use proceeds received from a sale of its private label food business — potentially valued at $1 billion — to buy other branded food businesses. One option mentioned in the article was B&G Foods, which owns the Green Giant and Pirate’s Booty brands.
Vertical Group factored the potential transactions into its ratings action.
“We believe that Post could potentially have interest in B&G given anticipated synergies and the potential to retire a large relative dividend." — Brett Hundley, Vertical Group
“We believe that Post could potentially have interest in B&G given anticipated synergies and the potential to retire a large relative dividend, the latter of which could be repurposed into brand support spend,” Mr. Hundley said. “When we run scenario analysis on a potential deal, we assume that Post acquires B&G for $35 per share, while also assuming the company’s rather large debt load. Interestingly, Post could drop its net leverage ratio down from ~6.0x presently to a pro-forma level near 5.5x, while also driving pro-forma e.p.s. accretion of 10% to 11%, but we calculate that it would also have to issue equity amounting to around $2 billion in value. We would not recommend buying the shares ahead of any potential equity raise. If the B&G deal doesn’t happen, we feel as though the shares already properly value any private brands transaction.”
Separately, Vertical Group also downgraded its outlook on Lancaster Colony shares to “hold” from “buy,” noting the Columbus, Ohio-based company’s shares are trading within 10% of Vertical’s $146 price target.
“The shares have performed well since mid-April, up 13.2% vs. a 1.8% increase in the S&P 500 index,” Mr. Hundley wrote. “In our last company report from April 26, we had argued that improvement in the shares was warranted, based upon expectations of improving financial optics ahead. To be sure, we have seen recent signs that Lancaster is gaining distribution for products like Marzetti salad dressings, and we believe that it continues to move past garlic bread disruption from earlier in the year. Cost savings/efficiency/optimization also remain an important, attainable goal for this management team. We now believe that the stock discounts much of our favorable forward earnings view, and we are moving to the sidelines, as a result.”