Renting Your Way to Growth with This Company

5 replies to "Renting Your Way to Growth with This Company"

• Bobby Cremins

  March 5, 2015

  $302 million NOPAT on $378 million Revenue seems too good to be true. $215 million in Net Income even sounds unreasonable. I haven’t read the 10-k, but I’m a little skeptical about this one
• Arnold

  March 7, 2015

  Would you send us a response to Bobby Cremin’s skeptical comments?

  Arnold Braswell
• Andre Rouillard

  March 9, 2015

  Bobby,
  Thanks for commenting. Post’s income in 2014 was boosted by a few major items.

  First is the $188 million gain on the sale of real estate assets. This item is included in net income, which is part of the reason that Post’s net income this year is so high. We also include this gain on real estate sale in Post’s NOPAT, as it is an REIT.

  Second is the ~$58 million that Post spent servicing its debt through interest payments and debt extinguishment. We remove these expenses as they are non-operating NOPAT is an unlevered measure of profit. These items, when removed, raise Post’s NOPAT even higher than its already high net income.

  While Post’s almost 80% NOPAT margin in 2014 is certainly on the high side, the company has posted NOPAT margins of over 60% three other times since 2004. Those years, Post also recorded significant gains from the sale of its real estate assets.

  In summary, while these kinds of margins are high for Post, they are by no means out of the ordinary.

  Best,
  André Rouillard, Investment Analyst
• Bobby Cremins

  March 13, 2015

  Thanks so much for the explanation on the adjustments to NOPAT Andre. I see how these kinds of margins can happen from time to time with real estate sales.

  Do you ever “normalize” NOPAT in your analysis for situations like this? It seems with companies that have asset sales and other periodic “income” that it would make more sense so that margins, ROIC, yield and pretty much all the measures you use for business strength and value aren’t skewed by occasional blips like this.

  The analysis “If Post can grow NOPAT by just 3% compounded annually for the next 7 years, the company is worth $103/share — an 84% upside from current levels.” seems a little oversimplified and dangerous since it is likely the margins and NOPAT are unsustainable at this level over a 7 year period.
• Andre Rouillard

  March 19, 2015

  Bobby, we do remove “blips” like this for almost every other company — the fact that Post is an REIT though led us to include this property sale in its NOPAT, as the company is in the business of buying, managing, and selling property.

  You’re certainly right that we probably should have included some additional discussion on that example from our model you mentioned. In cases like these, our technical tools have a bit less ability to add value to our discussion.

  Look at it this way: Even if we hadn’t included that income in Post’s NOPAT and its NOPAT was $187 million lower, the company still used that cash to pay down ~$200 million in debt. This lower debt raises Post’s economic book value in our model by roughly that same $200 million, so Post’s economic book value per share would be only slightly lower at around $80. Note that PPS’s current price is $57/share, so even without this extra income, Post is trading at a steep discount to its economic book value per share.

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