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. Instead of sipping Coke, they’re drinking “cola.” Times are just too tough for indulgences of almost any kind.
It’s no surprise then that Wal-Mart 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 and Treehouse Foods. 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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