Last month, food producer Post Holdings announced it agreed to buy Willamette Egg Farms, a producer and distributor of -- yep, you guessed it -- eggs.
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That news had a familiar ring to followers of the company. In April 2014, Post Holdings inked a nearly $2.5 billion deal to buy Michael Foods, a producer/distributor of egg products, cheeses, and other comestibles. That was Post's largest-ever acquisition.
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The company has traditionally been a purveyor of cereal products and related goods. Why, then, has it lately developed a seeming fascination with eggs?
Empty bowlsThe healthy-food trend that's been in force over the past few years hasn't favored the breakfast cereal segment, home to carbohydrate-loaded foods. With so many relatively wholesome alternatives, consumers are moving away from the bowl and starting their mornings with pieces of fruit, organic yogurt, granola snacks, etc.
Also playing into this shift is convenience. It's easier to grab a sandwich at the store, or a banana from the fridge, than get a bowl, milk, a box, and pour a bowl of Wheaties.
As a result, cereal consumption has been on the decline since its peak way back in 1996. Sales of ready-to-eat cereal have suffered accordingly. According to research company Euromonitor, cited in The Wall Street Journal, sales of ready-to-eat cereal fell from nearly $14 billion in 2000 to less than $10 billion in 2013. So this is a bad time to be a pure-play cereal maker.
Profit proteinMany of those increasingly health-conscious consumers now favor starting their day with substantial portions of protein. Like, for example, eggs.
That, combined with a recent wave of Avian Flu that wiped out tens of millions of chickens and turkeys, has supported a rise in prices. According to statistics from the government's Bureau of Labor Statistics, the average price for a carton of eggs in U.S. cities rose by nearly 15% on a year-over-year basis this past August.
That, by the way, was the highest figure of all foods tracked by the BLS.
So there's profit packed into those little orbs. As a division of Post Holdings, Michael Foods took in $565 million in its most recently reported quarter, and from that produced a profit of over $48 million. Far and away the majority of its sales come from eggs; obviously they're the protein fueling the positive result.
The Willamette Egg Farms buy, then, was a comparatively cheap ($90 million) add-on to this business. It should fold easily and relatively painlessly into the Michael Foods division.
A fatter birdMichael Foods was already the largest of Post's four divisions, and adding Willamette bulks it up to nearly $585 million in quarterly net sales. By comparison, consumer brands (basically the cereal business) has a top line of $357 million.
So there will be a lot of hens in Post's future. If consumer trends keep going the way they are, and prices remain relatively high, this will be very healthy for the company's results.
The article Post Holdings Goes Back to the Henhouse originally appeared on Fool.com.
Eric Volkman has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Post Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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