We recently hosted investor meetings with TreeHouse’s Chairman and Chief Executive Officer Sam Reed and Chief Financial Officer Dennis Riordan. Management reiterated the fundamental drivers discussed on the company’s fourth-quarter conference call in February.
That is, the value equation for consumers, profit and differentiation objectives of retailers, and product and service capabilities of manufacturers point to long-term market share gains for private label in food and beverage. In addition, fragmentation at the manufacturer level—coupled with strategic sourcing by retailers—should drive further consolidation at the manufacturer level. Management sounded optimistic that this backdrop provides the underpinning for modest but stable internal growth, strong free cash flow generation, and accretive acquisitions.
Given this, management believes it can double the sales of the company over the next several years, and do so while leveraging the cost of central capabilities. More currently, we believe underlying demand trends have been stable, despite harsh winter weather in parts of the country. Moreover, despite some recent volatility in certain commodities, management expressed comfort with cost visibility for 2014 given forward positions. And while acknowledging uncertainties present in single-serve beverages, management noted that the company is positioned to continue to serve a large and growing installed base and, over time, innovate to maintain relevance in this category. TreeHouse’s stock has essentially tripled in value over the past five years, reflecting profitable growth achieved via both internal and external means.
Looking forward, we believe the secular and structural industry factors—and company management and operating capabilities—contributing to this performance remain intact and, as such, continue to provide a basis for meaningful shareholder value creation. More specific, TreeHouse shares trade at a discount to a peer group of small- and midcap food companies, and we continue to like the story in light of the company’s ability to capitalize on favorable secular demand drivers for private label, increasing scale and scope in dry grocery, and consolidation at the manufacturer level. We maintain our Outperform rating.
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