Investor Pickle: Is Treehouse Foods Still Good?
Web Editor, "Mad Money"
Treehouse Foods has enjoyed a “big run” since Cramer’s March 11 recommendation, the Mad Money host said Tuesday – the stock is up 40% since then. And that’s just the latest of five profit-making calls on the private-label-food maker since March 2006. The question, though, was whether or not THS still had room to run.
Two of Cramer’s favorite technical analysts couldn’t seem to agree on Treehouse’s potential. One predicted THS would reach into the $40s, saying the recent dip from $38 was a “bull flag correction.” That’s what happens when a high-flying stock pulls back on weak volume. Technicians attribute this to decreased demand, not increased selling, and the “correction” can mean another big move higher is on the way. In the meantime, this analyst said that THS could be bought as low as $35.30, because that’s a support level at which buyers would rush in to buoy the share price.
The other chartist called Treehouse overextended, pointing to the stock’s significant move above its 200-day moving average. This average is a long-term technical measure of a stock’s trajectory. Even if THS broke out, and it would need to in order to make the bull-flag correction complete, this analyst thought the upside was limited.
What did Cramer think? He sided with the fundamentals, and they emphatically called THS a buy, buy, buy.
While Treehouse Foods and its lower-cost products – it makes generic brand soups, jams and jellies, baby food, pickles and more – made sense as a recession play, there’s another thesis that makes stock worth holding onto: the move toward private-label foods as a way to boost margins. That’s exactly the reason that Walmart , Kroger , Costco and other retailers have been increasing their stock. For every dollar’s worth of food sold, these companies make more profits. This has created a secular growth trend, Cramer said, that transcends money-conscious consumers.
Already Treehouse gets 61% of its sales to grocery chains, and 20% to food-service companies like Sysco and McDonald’s . And with commodity prices down and price points up, Treehouse has seen a significant increase in profitability: 2.75% last quarter.
Another plus for Treehouse is its acquisition strategy. This is a company with a long history of accretive M&A deals. So management’s announcement that as many as 13 potential takeovers could happen over the next six to 12 months gives investors something to look forward to.
Big run in share price or not, THS is still cheap. The stock fetches just 16 times next year’s expected earnings even though the CEO predicted earnings-per-share growth of more than 26% annually for the next three years. Momentum money managers would pay as much as 20 times earnings, Cramer said, for a stock like this. That means Treehouse may be a $45 name masquerading at a mere $37.
The technicians can disagree, Cramer said, but Treehouse’s fundamentals are strong. So “a big move” even higher could be in store for THS.
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