JPMorgan says this packaged food company can rally 25% due to strong cash flow

Published Fri, Oct 13 20236:23 AM EDTUpdated Fri, Oct 13 202311:41 AM EDT

Post Holdings is "a post-er child for strong free cash flow," according to JPMorgan. Analyst Ken Goldman initiated coverage on the company with an overweight rating. He also set a price target of $100 per share, suggesting shares could rise more than 25% from Thursday's close. The packaged food company includes a variety of categories and brands, many of which are under private labels. Its portfolio includes cereals such as Honey Bunches of Oats and Fruity Pebbles, as well as pet food brands Rachael Ray Nutrish and 9Lives. The company also sells frozen dishes, cheeses, eggs and egg substitutes. "Post generates strong cash flow, which may be applied in large quantities to reduce debt and buy back stock over the next two years," Goldman said in a Friday note. Over the past six years, Post's free cash flow conversion rate was a median 156%, well above the median larger-cap food producer's 92% median conversion rate. The analyst expects this outperformance trend to continue. "We believe that over the next few years, the combination of (a) general margin and EBITDA improvement, (b) debt paydown, and (c) share repurchases—the latter two driven by Post's strong free cash flow generation—will lead to outsized upside in the stock price versus the group," Goldman added. The company's unique business model also provides investors a differentiated investment opportunity, the analyst added. The company routinely engages in portfolio transformation and is "not afraid" to buy lower-growth assets as long as they offer consistent cash flow, Goldman said. He also noted that the company is "less afraid" of carrying leverage for a period of time. The company prioritizes free cash flow over earnings and does not pay a dividend. "Post's model is not for everyone; investors who prefer revenue growth stories, less M & A risk, and dividends are likely to look elsewhere. But for those who value cash flow and don't mind the occasional deal, there's nothing else quite like Post in our universe," Goldman said Shares ticked up 0.5% Friday during premarket trading. The stock is down 11.8% year to date. POST YTD mountain POST in 2023 — CNBC's Michael Bloom contributed to this report.