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What a brutal six months it’s been for TreeHouse Foods. The stock has dropped 38.5% and now trades at $22.64, rattling many shareholders. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy TreeHouse Foods, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think TreeHouse Foods Will Underperform?
Despite the more favorable entry price, we don't have much confidence in TreeHouse Foods. Here are three reasons why you should be careful with THS and a stock we'd rather own.
1. Demand Slipping as Sales Volumes Decline
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful staples business as there’s a ceiling to what consumers will pay for everyday goods; they can always trade down to non-branded products if the branded versions are too expensive.
TreeHouse Foods’s average quarterly sales volumes have shrunk by 1.3% over the last two years. This decrease isn’t ideal because the quantity demanded for consumer staples products is typically stable.
2. Low Gross Margin Reveals Weak Structural Profitability
All else equal, we prefer higher gross margins because they make it easier to generate more operating profits and indicate that a company commands pricing power by offering more differentiated products.
TreeHouse Foods has bad unit economics for a consumer staples company, signaling it operates in a competitive market and lacks pricing power because its products can be substituted. As you can see below, it averaged a 16.8% gross margin over the last two years. That means TreeHouse Foods paid its suppliers a lot of money ($83.24 for every $100 in revenue) to run its business.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
TreeHouse Foods historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 1.6%, lower than the typical cost of capital (how much it costs to raise money) for consumer staples companies.
Final Judgment
TreeHouse Foods falls short of our quality standards. Following the recent decline, the stock trades at 9.4× forward price-to-earnings (or $22.64 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better stocks to buy right now. Let us point you toward the most entrenched endpoint security platform on the market.