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Treehouse Foods Loses 35% in 15 Days: Where's It Headed?

Zacks Equity Research

Treehouse Foods, Inc. THS has been going through a rough patch for a while now, which is clear from its dismal stock price performance. Evidently, this Zacks Rank #5 (Strong Sell) stock has plunged 40.6% so far this year, much wider than the industry’s decline of 8.2%. In fact, this packaged foods and beverages manufacturer has fallen sharply by 35.4% in the past 15 days.





So, let’s delver deeper into what’s been hurting Treehouse Foods and see where its headed.

Persistent Industry Headwinds

TreeHouse Foods has been battling major industry hurdles like stiff competition, intense promotional headwinds and sluggish store traffic on account of consumers’ changing preferences and evolving shopping patterns. Consumers’ rapid shift toward online shopping and Amazon.com Inc.’s AMZN growing dominance has weighed upon store traffic. These factors and increased promotional activities also create considerable pricing pressure, which remains a threat to profit margins.

Elevated Costs

TreeHouse is incurring higher operating costs due to acquisitions, additional investments in sales force and general growth of the business along with higher incentive compensation. Further, escalated commodity and freight expenses significantly weighed upon the company’s operating performance in the third quarter, especially in Beverages and Snacks units. Owing to the aforementioned hurdles, direct operating income (DOI) margin in these segments contracted 610 and 480 bps respectively in the quarter. Also, management expects the division DOI to have a considerable drag on the bottom line in 2017. Moreover, commodity and freight costs are likely to remain high in 2018 as well, thus posing concerns.

Q3 Bears the Brunt, Dismal Outlook Dents Estimates
    
Treehouse Foods bore the brunt of the aforementioned headwinds in the recently reported third-quarter 2017, wherein both top and bottom lines declined year over year. Moreover, earnings came way below the Zacks Consensus Estimate as well as management’s guidance range. Results were hurt by pressurized volumes and challenges related to pricing in certain segments. Also, the divestiture of the SIF (Canned Soup and Infant Feeding) business marred the company’s top line in the quarter. Additionally, higher freight and commodity costs weighed upon the EBITDA (particularly the Beverages and Snacks segments).

Treehouse Foods, Inc. Price and Consensus
 

Treehouse Foods, Inc. Price and Consensus | Treehouse Foods, Inc. Quote

 

Unfortunately, management expects these problems to linger, which compelled it to curtail its earnings outlook to a band of $2.70-$2.80 per share, compared with the previously anticipated range of $3.15-$3.30. Ever since the drab quarterly outcome and view, the Zacks Consensus Estimate for the fourth quarter and 2017 have moved down from $1.29 to 93 cents and from $3.17 to $2.78, respectively.

A Ray of Hope Amid Hurdles

TreeHouse Foods is making attempts to enhance its operational performance and reduce cost structure through its TreeHouse 2020 strategy. The plan has been designed to restructure and realign the business as a whole. Alongside of cost savings, the initiative is expected to improve management of the company’s category and customer portfolio, as well as optimize its supply chain.  The plan, which will be carried out through a series of phases, is expected to improve the company’s operating margin by 300 bps by the end of 2020. Apart from this, the company remains focused on expanding its product offerings through strategic buyouts, which should aid its performance.

While these growth efforts appear impressive, it remains to be seen if they can help the company offset the present challenges. Thus, we prefer to remain on the sidelines for now.

Nervous About Treehouse? Check These Better-Ranked Stocks

McCormick & Company, Incorporated MKC with long-term EPS growth rate of 9.4%, carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

B&G Foods, Inc. BGS, with a Zacks Rank #2 has witnessed positive estimate revisions in the past 30 days.

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