The Unlikeliest Disrupter: Up 39% Year-To-Date
TreeHouse Foods (THS) products look more like the contents of a poor retiree’s cupboard than the makers of a great growing investment: canned soup, instant oatmeal, and boxed macaroni and cheese, for example, each wrapped in that homely store-brand packaging. Oh, and then there are the pickles and powdered creamers. Treehouse is the largest U.S. manufacturer of those.
So what, in this age of disdain for preservative-laced food, has investors so excited about Treehouse? The chart below shows that Treehouse’s last-century products are doing more for shareholders than the more natural yogurts and granolas sold by others.
Treehouse shares are up 50% in the past twelve months, which includes a 39% gain this year. That performance made Treehouse a better investment than natural foods purveyors Annie’s (BNNY), Hain Celestian (HAIN), Danone (DANOY) and Boulder Brands (BDBD). None of those companies would be caught dead selling powdered creamer.
In truth, there’s little about the Treehouse story to question the trend toward simpler foods. Each of those natural foods companies above reported double-digit quarterly revenue growth year-over-year. Treehouse, which with a $2.63 billion market cap is similar in size, reported revenue down a touch.
The short answer to TreeHouse’s popularity now is K-Cups, or “single-serve beverages” as they’re known to its private label customers. Green Mountain Coffee Roasters (GMCR), owner of real K-Cups and the Keurig machines that pour them, lost its patent protection on K-Cups last year.
TreeHouse had jumped on the technology even earlier, selling single serving coffee packets for Keurig machines at Wal-Mart Stores (WMT) for about two years prior. The early start allowed TreeHouse to grow into the biggest private label maker of the cups.
Whether K-Cup knock-offs warrant such enthusiasm for TreeHouse shares is unclear. It’s difficult to determine how much of TreeHouse sales come from cups, as that revenue is buried in results for its retail grocery division. (Which makes up about three quarters of the company.) However, TreeHouse did point out that most of that division’s 1.1% sales gain last quarter was due to sales of single-serve beverages.
Investors are more interested in the possibility of expanding the pods beyond coffee. Last week, TreeHouse announced the acquisition of Associate Brands GP Corp., which makes private label powdered drinks, specialty teas and sweeteners. The teas will go into pods immediately. Management hints that other drinks can eventually be sold in pods too.
TreeHouse’s share price has also been helped by a few acquisitions and the much-needed improvement in profit margins they are expected to bring. Citing the impact of cost-cutting measures, the company raised its full-year earnings guidance even though sales are expected to remain weak.
A bet on growth in the single-serve business alone could backfire if sales in the rest of the business are in decline, and there’s little consensus in the analyst community on TreeHouse’s prospects. Lately, the company’s strategy has been shifting. In March 2012, it purchased Naturally Fresh, a brand that makes high-end salad dressings sold in the refrigerator section. Since then, management has questioned the wisdom of selling name brands when grocers that pay it to produce their own labels remain TreeHouse’s biggest customers.
Of late, investor enthusiasm for the disruptive power of off-brand K-Cups has pushed TreeHouse's PE ratio nearly to 30, which is pretty rich territory for such a slow-growth outfit. With a valuation like that, a negative surprise on earnings, or some other hiccup, could send the shares steeply downward.
Don’t expect another K-Cup-like product at this company soon. Acquisitions will likely focus on products it can easily turn into private label brands, whether sold in pods or not. In July, TreeHouse purchased Cains Foods. Its top seller: mayonnaise.
Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at email@example.com. You can also request a demonstration of YCharts Platinum.
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