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Costco, Amazon, and Trader Joe’s Have Great Snacks. Buy the Company That Makes Them.

TreeHouse Foods produces private-label foods and beverages for retailers.

Courtesy of TreeHouse Foods, Inc.

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Inflation has taken a bite out of budgets, and that’s particularly true at the grocery store, as everyday essentials from cereal to sugar have shot up in price. That sticker shock provides motivation for strapped consumers to eschew their favorite brands for less-expensive generics—often made by TreeHouse Foods.

TreeHouse (ticker: THS) is the only major publicly traded pure play on private-label food products, an area that was expanding before the pandemic and has since been turbocharged by price increases, economic unease, and stores’ desire to sell exclusive products. That hasn’t helped the stock, which, due in part to high costs and supply-chain problems, has climbed just 3.3% over the past three years, even as the S&P 500 gained 39%.

The TreeHouse of today—a major vendor to retailers including Costco Wholesale (COST), Walmart (WMT), Amazon.com (AMZN), Aldi, and Trader Joe’s—looks far different than it did just 10 months ago. A combination of management changes and asset sales has left it leaner and more focused on what it does best—creating great products for companies looking to boost their sales of off-label food products. And it’s why JANA Partners is still bullish on the company’s ability to capitalize on its strengths two years after first it took a stake in the company.

“TreeHouse is one of the only ways to invest [in] two of the most powerful underlying megatrends in food,” says Scott Ostfeld, a managing partner and portfolio co-manager at JANA who sits on TreeHouse’s board of directors. “The first is the focus on expanding private-label store brands at the expense of national brands by large American retailers, as penetration of store brands is well below that in other countries. And second is the search for value and affordability by consumers.”

It hasn’t been easy for TreeHouse to get to this point. The company has struggled as rapid commodity inflation squeezed already razor-thin margins and supply-chain woes hurt operations. In addition, it was burdened with poor acquisition integration—mistakes are bound to happen with a company that was built from dozens of deals—and an underperforming meal-preparation business that included products like pastas and syrups. That division accounted for some 60% of sales in recent years, but its low margins and operational problems meant earnings growth wasn’t consistent.

“It has been a very long and difficult road, but after restructuring, it’s finally well positioned,” says Benjamin Nahum, a portfolio manager at the Neuberger Berman Intrinsic Value fund, which has owned the shares since 2017. “TreeHouse has been tested, and it has come out a leaner, more profitable company.”

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The bigger change might have been the sale of its meal-prep unit to a private-equity firm for $950 million—or a juicy 14 times earnings before interest, taxes, depreciation, and amortization. That’s a higher multiple than the stock, at 11.8 times, currently commands. The move shored up TreeHouse’s balance sheet and left it with a promising snack and beverage portfolio. Analysts now expect the company’s earnings per share to more than double in 2023, to $2.62, on a nearly 7% climb in revenue.

“We think it was a great deal, full stop,” says Nahum. “It was a great transaction that simplified the company.” Ostfeld agrees. “TreeHouse is now a higher-growth, higher-margin company that should trade at a premium to where it has historically traded,” he says.

That hasn’t happened yet. TreeHouse stock trades for 17.5 times forward earnings, below its five-year average of 18.7 and that of peers like Post Holdings (POST), at 19.4 times. Even a better-than-expected earnings report last month couldn’t boost the stock, as downbeat second-quarter sales guidance, probably the result of supply-chain improvements that moved orders from the second quarter into the first, weighed on shares. “This was a great start to the year for TreeHouse, [which] included private-label growth surpassing 2019 levels,” writes Truist Securities analyst Bill Chappell, who has a $60 price target on the stock, up 20% from Friday’s close of $49.84.

The next leg up could come on TreeHouse’s investor day on June 13. CEO Steve Oakland says the company plans to provide investors with a “deeper understanding” of its strategy and its improved capital structure—which allowed it to purchase Farmer Bros. ’ (FARM) coffee-processing facility and shipping business for $100 million, announced this past week.

The move comes at a time when retailers are clamoring to enhance their brands with high-quality private-label products. While consumers may once have looked askance at these no-name options, much of the stigma surrounding them is gone, thanks to cult favorites like Costco’s Kirkland brand and offerings from Trader Joe’s. Target (TGT) and Amazon have also been steadily building their own brands that are less subject to competition and price comparison.

The biggest risk might be that cooling inflation and lower prices could lead to fewer consumers trading down. Still, it’s unlikely that major food deflation will occur, particularly as national brands look to protect their margins, given higher packaging and transport costs. Meanwhile, consumers still face higher bills for things like shelter and child care than a few years ago.

And if the economy does continue to weaken, TreeHouse would probably benefit, as well. “At the very least, TreeHouse is a place to hide in an uncertain market,” says Chris Terry, portfolio manager at Hodges Capital, which owns the shares.

Talk about comfort food.

Write to Teresa Rivas at teresa.rivas@barrons.com