Over the past six months, TreeHouse Foods has been a great trade, beating the S&P 500 by 10.2%. Its stock price has climbed to $24.65, representing a healthy 19.8% increase. This performance may have investors wondering how to approach the situation.
Is now the time to buy TreeHouse Foods, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think TreeHouse Foods Will Underperform?
We’re happy investors have made money, but we're swiping left on TreeHouse Foods for now. Here are three reasons we avoid THS and a stock we'd rather own.
1. Demand Slipping as Sales Volumes Decline
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful staples business as there’s a ceiling to what consumers will pay for everyday goods; they can always trade down to non-branded products if the branded versions are too expensive.
TreeHouse Foods’s average quarterly sales volumes have shrunk by 3.2% over the last two years. This decrease isn’t ideal because the quantity demanded for consumer staples products is typically stable. 
2. Shrinking Operating Margin
Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
Analyzing the trend in its profitability, TreeHouse Foods’s operating margin decreased by 6.4 percentage points over the last year. TreeHouse Foods’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was negative 4.5%.
3. Previous Growth Initiatives Haven’t Paid Off Yet
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
TreeHouse Foods’s five-year average ROIC was negative 0.4%, meaning management lost money while trying to expand the business. Its returns were among the worst in the consumer staples sector.
Final Judgment
We see the value of companies helping consumers, but in the case of TreeHouse Foods, we’re out. With its shares outperforming the market lately, the stock trades at 13.2× forward P/E (or $24.65 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are better investments elsewhere. We’d suggest looking at the most dominant software business in the world.
Stocks We Would Buy Instead of TreeHouse Foods
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