Several weeks after TreeHouse Foods Inc. (THS, Financial) announced the sale of a portion of its meal prep business as part of its strategic transformation, activist investment firm Jana Partners (Trades, Portfolio) revealed it reduced its stake by 7.48%.
Taking a value-oriented, event-driven approach to picking stocks, the New York-based firm founded in 2001 by Barry Rosenstein often enters activist positions in order to help unlock value for shareholders.
After leaving the position unchanged during the second quarter, GuruFocus Real-Time Picks, a Premium feature based on 13D, 13G and Form 4 filings, show the firm sold 383,605 shares of the Oak Brook, Illinois-based consumer packaged goods company on Aug. 23, impacting the equity portfolio by -1.64%. The stock traded for an average price of $49.34 per share on the day of the transaction.
Jana now holds 4.75 million shares total, which represent 20.60% of the equity portfolio. It was the firm’s largest holding as of the end of the second quarter according to the 13F report. GuruFocus estimates the firm has gained 10.52% on the investment since establishing it in the fourth quarter of 2020.
In April, Jana also scored a temporary seat on TreeHouse’s board with the appointment of Scott Ostfeld. His term will expire at the company’s 2023 annual meeting.
The deal
On Aug. 11, TreeHouse, which manufactures and distributes private-label foods and beverages, disclosed it is selling a significant portion of its Meal Preparation business to Investindustrial, a European group of investment, holding and advisory companies, for $950 million.
According to the terms of the agreement, which consists of approximately $530 million in cash and $420 million in senior secured debt, the categories TreeHouse will divest of include pasta, pourable and spoonable dressing, preserves, red sauces, syrup, dry blends and baking, dry dinners, pie filling, pita chips and other sauces.
In a statement, Chairman Ann M. Sardini said the sale “will deliver greater value for our shareholders” and allows TreeHouse to concentrate on the Snacking and Beverages segment.
"This transaction enables us to simplify our business and thus improve operational execution, further enhancing our ability to accelerate growth through category depth in our higher growth and margin Snacking and Beverages business," she said.
The company noted the proceeds from the sale, which is expected to close in the fourth quarter, will be used to reduce debt and strengthen the balance sheet.
CEO and President Steve Oakland also said that the sale will “better position” TreeHouse to benefit from the “positive demand trends for private label.”
“This transaction strengthens our balance sheet, improves execution consistency and accelerates our ability to invest across snacking and beverage categories that present attractive growth opportunities,” he said. “Our continued focus on commercial and operational excellence, people and talent, and driving simplification and growth that have been the hallmarks of our successful efforts to transform TreeHouse will remain as we continue our evolution in line with our strategy."
Valuation and financials
TreeHouse has a $2.67 billion market cap; its shares were trading around $47.14 on Friday with a forward price-earnings ratio of 39.17, a price-book ratio of 1.47 and a price-sales ratio of 0.57.
The GF Value Line suggests the stock is fairly valued currently based on historical ratios, past financial performance and analysts’ future earnings estimates.
The GF Score of 64 out of 100, however, indicates the company has poor future performance potential. While TreeHouse received middling marks for profitability, financial strength and GF Value, its grades for growth and momentum were low.
TreeHouse reported its second-quarter financial results on Aug. 8.
The company posted an earnings loss of 53 cents per share on $1.2 billion in revenue for the quarter, which grew 19.4% from the prior-year period.
GuruFocus rated TreeHouse’s financial strength 4 out of 10 on the back of weak interest coverage and a low Altman Z-Score of 1.34 that warns it could be at risk of bankruptcy. Further, the return on invested capital is eclipsed by the weighted average cost of capital, meaning the company is struggling to create value as it grows.
The company’s profitability did not fare much better, scoring a 5 out of 10 rating as a result of declining margins and negative returns on equity, assets and capital that are underperforming versus competitors. TreeHouse also has a moderate Piotroski F-Score of 4 out of 9, so conditions are typical for a stable company. Due to a decline in revenue per share in recent years, the predictability rank of one out of five stars is on watch. GuruFocus found companies with this rank return, on average, 1.1% annually over a 10-year period.
Guru investors
With an 8.47% stake, Jana is by far the company’s largest guru shareholder. As of the end of the second quarter, other guru investors that had positions in TreeHouse included Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Ray Dalio (Trades, Portfolio), Steven Scruggs (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio).
Portfolio composition
As of the three months ended June 30, Jana Partners (Trades, Portfolio) had over 30% of its $1.16 billion equity portfolio, which consisted of nine stocks, invested in the health care sector. Consumer defensive had the second-largest representation at 21.51%, followed by the industrials space at 18%.
Based on 13F data, the firm’s other holdings as of the end of the second quarter were Mercury Systems Inc. (MRCY, Financial), Laboratory Corp. of America Holdings (LH, Financial), New Relic Inc. (NEWR, Financial), the S&P 500 ETF Trust (SPY, Financial), Encompass Health Corp. (EHC, Financial), Conagra Brands Inc. (CAG, Financial), Enhabit Inc. (EHAB, Financial) and BlackSky Technology Inc. (BKSY, Financial).
Investors should be aware 13F filings do not give a complete picture of a firm’s holdings as the reports only include its positions in U.S. stocks and American depository receipts, but they can still provide valuable information. Further, the reports only reflect trades and holdings as of the most-recent portfolio filing date, which may or may not be held by the reporting firm today or even when this article was published.
