Post does not have the profile of a defensive investment based on the requirements of Ben Graham. The Packaged Foods firm may nonetheless be of interest to more risk-oriented investors who have a solid thesis on the company's future growth. At Market Inference, we remain agnostic as to such further developments, and prefer to use a company's past track record as the bellwether for future potential gains.
Post trades at Attractive Multiples
Benjamin Graham's so-called “Graham number” is a popular metric determining the fair price of a stock in relation to its earnings and the book value of its equity. We calculate the Graham number as √(22.5 * 6 year average earnings per share (3.19) * 6 year average book value per share (64.523), which for Post gives us a fair price of $124.39.
In comparison, Post’s market price is $84.04 per share. The analysis shouldn’t end here. The Graham number is just one of seven requirements for defensive stocks listed in Chapter 14 of The Intelligent Investor, which we will review below.
Impressive Growth, but Inconsistent Profitability and no Dividend
Post’s average sales revenue over the last 6 years has been $7.64 Billion, so by Graham’s standards the company is large enough to warrant an investment. When published in 1972, Graham’s threshold was $100 million in average sales, which would be the equivalent of around a half million dollars today. Needless to say, this is the least important of Graham's requirements, and may be overlooked by all but the most conservative investors.
More importantly, Ben Graham believed that a margin of safety could be obtained by investing in companies with consistently positive retained earnings. Post had negative retained earnings in 2014, 2015, and 2016 with an average of $43.16 Million over this period. So the company is not accumulating enough cash over time by Graham's standards.
Graham also required a 30% or more cumulative growth rate of the company's earnings per share over the last ten years.To determine Post's EPS growth over time, we will average out its EPS for 2010, 2011, and 2012, which were $0.72, $0.37, and $0.23 respectively. This gives us an average of $0.44 for the period of 2010 to 2012. Next, we compare this value with the average EPS reported in 2020, 2021, and 2022, which were $0.01, $2.38, and $12.09, for an average of $4.83. Now we see that Post's EPS growth was 997.73% during this period, which satisfies Ben Graham's requirement.
We have no record of Post offering a regular dividend.
Post’s Balance Sheet Meets Graham’s Criteria
It was also essential to Graham that the company’s current assets outweigh its current liabilities, and that its long term debt be inferior to the sum of its net current assets (current assets minus total liabilities). This is the aspect of the analysis that most companies fail, yet Post passes comfortably, with an average current ratio of 2.2, and average debt to net current asset ratio of -1.0.
Conclusion
According to Graham's analysis, Post is likely a company of average quality, which does not offer a significant enough margin of safety for a risk averse investor.
2017-11-17 | 2018-11-16 | 2019-11-22 | 2020-11-20 | 2021-11-06 | 2022-11-17 | |
---|---|---|---|---|---|---|
Revenue (MM) | $5,226 | $6,257 | $5,681 | $4,711 | $4,981 | $5,851 |
Gross Margins | 30.0% | 30.0% | 32.0% | 31.0% | 28.0% | 25.0% |
Operating Margins | 10% | 11% | 13% | 11% | 10% | 7% |
Net Margins | 1.0% | 7.0% | 2.0% | 0.0% | 3.0% | 13.0% |
Net Income (MM) | $48 | $467 | $125 | $1 | $167 | $757 |
Net Interest Expense (MM) | -$315 | -$387 | -$322 | -$334 | -$333 | -$318 |
Depreciation & Amort. (MM) | -$323 | -$398 | -$380 | -$345 | -$366 | -$380 |
Earnings Per Share | $0.33 | $3.94 | $1.06 | $0.01 | $1.71 | $12.07 |
EPS Growth | n/a | 1093.94% | -73.1% | -99.06% | 17000.0% | 605.85% |
Diluted Shares (MM) | 107 | 116 | 115 | 107 | 97 | 63 |
Free Cash Flow (MM) | $566 | $944 | $960 | $856 | $760 | $620 |
Capital Expenditures (MM) | -$180 | -$225 | -$272 | -$230 | -$172 | -$237 |
Net Current Assets (MM) | -$6,471 | -$7,797 | -$6,888 | -$7,030 | -$7,269 | -$5,954 |
Long Term Debt (MM) | $7,149 | $7,232 | $7,066 | $6,959 | $6,442 | $5,957 |
Net Debt / EBITDA | 6.49 | 5.71 | 5.49 | 6.62 | 6.76 | 6.75 |