Treehouse Foods: Focusing On More Lucrative Sectors (NYSE:THS)
TreeHouse Foods (NYSE:THS) specializes in producing private label packed foods and beverages. The company offers high-quality natural and organic products that are supplied from either one of the company’s 20 facilities. Since its founding in 2005, TreeHouse has acquired multiple companies through its subsidiary Sturm Foods, which manufactures dry groceries under private label brands for global distribution
TreeHouse isn’t one of the largest companies in its sector by any means, but by focusing on good quality products, as well as specific sectors that are foundational to the food industry as a whole, it might just be one of the best. We will look at the company’s annual report, why recent months are not indicative of things to follow, and why investors should be optimistic about the future.
TreeHouse saw an uneventful year when it came to the revenue reported, finishing 2021 with $4.327 billion in total revenue, just slightly below the $4.349 billion reported in the previous year. As was expected, the global supply issues harmed business, negatively affecting its ability to deliver its product at an affordable price. Revenue was expected to increase in the final quarter, and it did, registering an annual quarterly record of $1.165 billion. This would be the first sign of improvements to come in the following year as economies opened up again following pandemic-related restrictions. Net sales gained some momentum throughout the year, finishing at $163.4 million in the fourth quarter. Still, it is worthy to note that the annual net sales of $594.9 million reported is significantly lower than that reported three years prior, when TreeHouse saw a total of $728.6 million in sales. This figure is even more exaggerated when adjusted for inflation, which shows that the difference is much larger than a $133.7 million decline in sales between 2018 and 2021. As can be expected after all this, net income was not positive, closing at -$12.5 million, after the fourth quarter alone wiped off -$29.1 million from the $16.6 million gain in the previous three quarters. Operating income and investments ultimately led to unfavorable figures as TreeHouse scrambled to respond to a hungry market emerging from the crisis. While this was enough to undo the progress made in 2021, it can be assumed that the investments made in the fourth quarter will carry on to 2022, which might see better results as it benefits from previous losses. Evidencing this is the quarterly increase in sales made from the $135.8 million reported in Q3 to the aforementioned $163.4 million in Q4. That trend will continue into the new year without incurring the costs from the previous quarter.
Long-term debt saw a decline from $2.199 billion to $1.89 billion. If the company was able to make the necessary investments from the increased revenue without adding more debt, even though their profits did suffer, it just goes to show how committed and confident the company is in its short-term future. At $5.207 billion in total assets at the end of 2021, there isn’t much deviation from recent years and a decent figure to wrap things up.
If anything, TreeHouse’s Q4 just goes to show the company is prepared to take a minor hit to guarantee its long-term future. This could go wrong if those investments were made in the wrong places or if the company’s business model itself was not sustainable, which is why we will look at what TreeHouse plans for 2022 and beyond.
A Strong Market
The grocery manufacturing industry at large brings up one major concern regarding TreeHouse’s most recent quarter – the company performed much worse than its peers. While TreeHouse saw revenue decline of 0.96% in the fourth quarter, the average industry rate in Q4 stood at 7.77%, much higher in comparison. However, a closer look at the company’s annual track record reveals something hinted at earlier; namely, the rest of the years actually saw positive growth. When comparing the first three-quarters of 2021, TreeHouse outperformed its peers, and while the company’s net income nearly canceled out gains from 2020, the average industry income was reported at –3.08%. It is worthy to note that TreeHouse is not the most significant player in its sector, but the company has bigger plans, especially given the industry’s resurgence. The company has stated that it is addressing issues related to the supply chain, which was the cause of various problems last year, as well as improving staffing and pricing actions to mitigate inflation.
The food market is expected to grow at a compound annual growth rate of 5.29% from 2022 to 2026 and is set to pass $9 trillion in 2022. The largest segment in the market is confectionery and snacks, which has an estimated market volume of over $1.5 trillion alone. It is no surprise that is one of TreeHouse’s key targets. By divesting its Meal Prep business, the company will focus more on Snacks and Beverages, as announced in the final quarter of 2021.
Even as TreeHouse’s net earnings plunged below zero in Q4, the company’s earnings per share maintained positive figures, closing the fiscal year at $0.11, slightly beating estimates of $0.08. However, due to the nature earnings will have on (EPS), the first quarter of 2022 is expected to feel the effects of previous losses and is currently forecasted at -$0.4. If the company’s strategies work, however, this is expected to rise and surpass last year’s highest EPS gradually. Even a dip in form isn’t enough to place the company’s current ratio below 1, as the company reported 117% for the fiscal year, which will keep its balance sheet favorable for the time being. The company’s market cap has faltered over the last few years, having finished 5.84% lower in 2021 than it did the year before and far from the levels it reached in 2016. That said, the amount it has declined in the last three years has gotten lower, and the next few years are expected to mark the beginning of a steady upward trend.
While optimism for 2022 should be maintained, one can expect a slow start to the year, with the first quarter not expecting to report any major gains. However, the company’s strategy should start to show results in the following months, and a solid close to the fiscal year is expected.
Companies will need to prove smart enough to meet the challenges of fulfilling supply chain demands, especially in areas with high growth. Just in the last year, we saw how much a semi-efficient supply could hamper distribution, how prices could affect sales and profitability, and how and where the industry needs to focus its growth. TreeHouse has proven that it is savvy enough to know when to take a break from short-term gains in favor of a more sustainable strategy while also not doing damage that might come back to harm the company. Given the nature of the industry, these sorts of decisions are all that are needed to evaluate a company. Overall, investors should be highly encouraged and bullish given TreeHouse’s reduction of debts and clear shift in focus to more lucrative sectors.