Competition Crunches the Breakfast Cereals

 | Aug 08, 2013 | 10:00 AM EDT  | Comments
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Breakfast has become a battleground for on-the go Americans. Every fast food and quick service joint in the country wants you to stop by for some type of morning sandwich, or "portable breakfast food".

All the competition has hit cereal makers hard. But you wouldn't know it by looking at their stock prices.

Breakfast giant General Mills (GIS) is up 26% year-to-date. Post Holdings (POST) and Kellogg (K) are up 17% and 15%, respectively. Kellogg's morning foods business was down 3.3% as consumers ate fewer Frosted Flakes.

Last quarter, cereal sales at General Mills turned soggy. Sales of Cheerios and Lucky Charms fell 2.2%. According to Goldman Sachs, breakfast sales were off 1.3% last year, while portable breakfast food sales rose 2.6%.

Despite weakness in the U.S., ready-to-eat cereal is a $26 billion business and sales in the rest of the world are expected to grow in the mid-single digits.

Post Holdings reported on Wednesday its third quarter results. Sales for the quarter were $257.3 million, up 6.4% year-over-year. Because of a one-time acquisition expense, earnings per share came in $0.03 less than the consensus estimate.

Earlier this month, POST announced plans to acquire Premier Nutrition for $180 million in cash. The deal will add about $135 million to revenue and about $18 million to earnings before interest, taxes, depreciation and amortization.

POST's results were not much of a surprise. The company cut second quarter guidance on July 11. If you recall, POST missed the first quarter by $0.08. First quarter sales fell 0.9%, because average selling prices fell 4%.

For the year, analysts expect POST to earn $1.03 on $1.008 billion in revenue, which is up 5% over last year. But if you look out to next year, the Street thinks the company can grow revenues almost 10% to $1.108 billion. The growth is coming from acquisitions and new products. If the company were to achieve those results, the stock would probably be worth $48. But it's already at $46 now.

Even with acquisitions and new products, I wouldn't have a hearty helping of these names. The valuations are pretty full and I think the stocks will get soggy.

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