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As an inevitable result of this recession, cash-strapped consumers are cutting costs and spending less. People may be buying corn flakes, but you can bet they’re not from Kellogg [K
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]. Instead of sipping Coke [KO
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], they’re drinking “cola.” Times are just too tough for indulgences of almost any kind.
It’s no surprise then that Wal-Mart [WMT
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] re-launched its private-label brand, Great Value. These generic products cost anywhere from 5% to 20% less than national brands, which is just the kind of savings that consumers need right now. But Wal-Mart’s a winner here, too, because private-label margins are much bigger than those of brand names.
Citigroup estimated that overall private-label penetration could reach 40%, which is much higher than the 16% penetration in Wal-Mart right now and 30% in regular supermarkets. So there’s plenty of room for growth here. The two companies best positioned to take advantage, Cramer said, are Ralcorp [RAH
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] and Treehouse Foods [THS
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]. The stocks are up 13% and 16%, respectively, since his Dec.16 call, compared with the S&P 500’s 14%decline, and the Wal-Mart catalyst should push them higher.
Ralcorp, which is known largely for its generic cereals, earns 17% of its sales through Wal-Mart. So again, there’s a good chance to grow that number. But beyond Wal-Mart and the private-label business in general, Ralcorp has another thing going for it – its Post cereals acquisition. The merger is expected to save the company 14 cents a share in the last quarter of fiscal 2009 and 29 cents a share in fiscal 2010, Credit Suisse said. Also, Ralcorp’s commodity hedges expire in March, so food costs should come down significantly after that.
As for Treehouse, its Wal-Mart exposure is just 13% right now, so expect the company’s private-label pickles, soup, baby food and non-dairy creamers to grab more shelf space. The latest quarter beat analysts’ expectations, thanks to bigger product volumes and increased margins, giving Cramer reason to think the offered guidance was a bit too conservative. So there’s a good chance Treehouse could beat the Street again.
Another positive here: The company grows through acquisitions. Management has said there’s plenty of available credit for them to continue that, and we know the market’s full of cheap, takeover-worthy companies right now.
Both Ralcorp and Treehouse are trading at just about 15 times 2010 earnings. So investors will pay up for these recession-resistant stocks. But there’s reason to think analysts will increase estimates as they factor in the Wal-Mart move, yet another catalyst that could send RAH and THS higher.
Cramer thinks Ralcorp and Treehouse Foods are buys.
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