Why Is TreeHouse (THS) Down 16.4% Since Last Earnings Report?

It has been about a month since the last earnings report for TreeHouse Foods (THS). Shares have lost about 16.4% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is TreeHouse due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

TreeHouse Foods Q4 Earnings Beat Estimates, Sales Miss

TreeHouse Foods released fourth-quarter 2019 results. Adjusted earnings from continuing operations amounted to $1.10 per share that surpassed the Zacks Consensus Estimate by a penny. The bottom line grew 10% from the year-ago quarter’s level of $1.00.

Net sales of $1,139.5 million missed the consensus mark of $1,161 million and fell 4.5% year over year. The downside was caused by adverse impacts from SKU rationalization of 0.7%. Organic sales fell 3.8% primarily due to adverse volume/mix of almost 4%. Pricing favorably impacted organic sales by almost 0.2%.

Gross margin came in at 19.8%, down 130 basis points (bps) from the year-ago quarter’s figure. The downside was caused by lower volumes and increased expenses related to change in regulatory requirements, partly offset by lower cost of restructuring program. Total operating expenses, as a percentage of sales, increased 0.4 percentage points to 17%. Further, adjusted EBITDA from continuing operations increased 4.9% to $161.1 million driven by lower freight costs, savings from the Structure to Win and TreeHouse 2020 initiatives, partly offset by lower volume.

Segment Details

Baked Goods: During the fourth quarter, sales in the segment fell 4.4% year over year to $406.5 million. The downside was caused by SKU rationalization and adverse volume/mix. This was partially mitigated by favorable impacts from pricing. Direct operating income (DOI) margin in the segment advanced 80 bps to 13.3%, driven by lower freight costs, savings from the Structure to Win and TreeHouse 2020 initiatives. These were partially negated by lower volumes and higher period expense.

Beverages: Sales fell 6.5% to $268 million due to unfavorable pricing and trade as well as negative impact of volume/mix. DOI margin declined 130 bps to 16.5% due to unfavorable pricing, partially countered by lower freight costs.

Meals Solutions: Net sales declined almost 3.5% to $465 million due to adverse volume/mix and adverse currency fluctuation. However, the decline was partly compensated by improved pricing and lower spending on trade. DOI margin declined 30 bps to 13.7% due to unfavorable volume/mix. These were partially mitigated by pricing actions and reduced trade spend.

Other Financial Updates

The company concluded the quarter with cash and cash equivalents of $202.3 million, long-term debt of $2,091.7 million and total shareholders’ equity of $1,830.9 million. In 2019, cash provided by operating activities amounted to $263.9 million. For 2020, the company expects free cash flow between $250 million and $300 million.

Other Developments & Guidance

On Jan 13, 2020, TreeHouse Foods and Post Holdings mutually decided to pull the plug on their deal, as part of which the former would sell its ready-to-eat (RTE) cereal business to the latter. Also, TreeHouse Foods inked a deal to offload two of its in-store bakery facilities to Rich Products Corporation, which is likely to help the former focus on core growth areas. Notably, the transaction with Rich Products is expected to conclude by Apr 10, 2020.

Sales for 2020 are expected in the range of $4.10-$4.40 billion. The company delivered net sales of $4288.9 million (nearly $4.29 billion) in 2019. For 2020, the company anticipates adjusted EBITDA in the range of $480-$510 million. Net interest expense is projected to be in the range of $93-$97 million. In the same time frame, management expects adjusted earnings from continuing operations in the band of $2.40-$2.65, suggesting a rise of 6% year over year at midpoint.

Net sales for the first quarter of 2020 are expected in the band of $0.98-$1.02 billion. The company delivered net sales of $1,301.1 million (nearly $1.30 billion) in the first quarter of 2019. Further, management expects first-quarter 2020 adjusted earnings from continuing operations in the range of 20 cents to 30 cents. The company posted adjusted earnings of 13 cents in the first quarter of 2019.

How Have Estimates Been Moving Since Then?

Estimates review followed a downward path over the past two months. The consensus estimate has shifted -40.04% due to these changes.

VGM Scores

Currently, TreeHouse has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

TreeHouse has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.