This food producer is a good turnaround candidate, with double-digit earnings expected next year.
TreeHouse Foods, Inc. (THS)
From Cabot Turnaround Letter
TreeHouse Foods is a speculative pick for 2022. The company is a major contract producer of private label foods. TreeHouse has struggled with poor execution and elevated debt resulting from its acquisition-driven strategy.
While the private label food industry has continued to grow, TreeHouse’s results have continued to sag. Efforts starting in 2016 to improve its inefficient operations, including divestitures and the replacement of the original CEO in March 2018, have proven only modestly effective.
The shares are 60% below the 2016 peak, and now trade only modestly above the 2005 spin-off price. Nevertheless, the company remains profitable and generates reasonable free cash flow. While third quarter results were dreary, as expected, demand for TreeHouse’s products is ahead of its production ability, and consumers appear to be incrementally shifting back to the lower-priced store brands that TreeHouse produces.
Also, the margin squeeze from higher costs will increasingly be offset by better pricing. Critical to our thesis, respected activist investor JANA Partners has steadily built a stake, now at 9.2%, and holds two board seats. Their standstill agreement expired on December 15, so it is likely that JANA will step-up its pressure to either sell the company or change its strategy and leadership.
Trading at only 9.6x estimated 2022 EBITDA, the shares offer considerable upside.
Bruce Kaser, Cabot Turnaround Letter, cabotwealth.com, 978-745-5532, December 29, 2021