THS Treehouse Foods Inc

TreeHouse Foods Inc. (THS) recently reduced its fiscal 2011 earnings outlook to $2.90–$3.00 from $3.00–$3.08 after taking into account higher freight, transportation, packaging and other related commodity costs. The guidance includes the second-quarter earnings projection of 42–44 cents. Following the announcement, Zacks Consensus estimates for the second quarter and fiscal 2011 declined 28 cents and 15 cents to 43 cents and $2.91, respectively.

TreeHouse had expected to counter the increased expenses through pricing, which took place after the company had already incurred the higher costs. The pricing initiated in the ongoing second quarter will now be realized in the third and fourth quarters of 2011, resulting in about 6 cents per share of unrecovered expense in the quarter’s results.

Last month, management noted that surging export demand for grains and oilseeds as well as a rise in crude oil prices led to a spike in input costs. While TreeHouse had hedged the primary ingredients of the cost structure, unhedged secondary inputs has hit the company badly.

After steady growth in the last six months in tune with the economic recovery, consumer confidence has fallen suddenly in the second quarter which forced TreeHouse to hold up pricing action. Management commented that high gasoline prices affected consumer spending, even of essentials.

Illinois-based TreeHouse, which operates as a food manufacturing company serving primarily the retail grocery and foodservice channels, now estimates strong organic sales growth of 3.5–4.0% and total net sales of nearly $490 million. However, second-quarter margins are expected to fall short by 250 basis points year over year to be in the 22–23% range. For the full year, TreeHouse expects gross margins to be flat to slightly below last year.

Despite the disappointing projection for the second quarter, TreeHouse expects to overcome these temporary difficulties in short order. The company anticipates rapid margin recovery with the effectiveness of delayed pricing. Moreover, most of the big win sales will be realized in the back half of the year from increased distribution of higher-margin products.

TreeHouse currently retains a Zacks #4 Rank (short-term Sell recommendation). However, we still have a long-term Neutral rating on the stock. The company will announce its second quarter results on August 1. Major competitors of TreeHouse include Corn Products International Inc. (CPO) and Omega Protein Corp. (OME).

 
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TREEHOUSE FOODS (THS): Free Stock Analysis Report
 
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