Have you ever heard of the “Purina Portfolio?”
No? That’s OK — very few have. It doesn’t exist. At least not in a real investment account. It’s a figment of my imagination created after reading about Bill Stiritz, the current CEO of Post Holdings (POST) and former CEO of Ralston Purina.
Considered one of the most successful executives in the food business, Stiritz’s career has touched a number of publicly traded companies. Together, the 10 companies that comprise the Purina Portfolio have seriously outperformed their benchmarks.
First covered in early March, it’s time for a revisit. First, let’s take a look at the sweet returns of the portfolio and talk about a couple of the holdings. Then, we’ll talk about why the Purina Portfolio works so well:
| Company | Ticker | Return |
| Jack in the Box | JACK | 39.8% |
| ITT Corp. | ITT | 54.5% |
| Flowers Foods | FLO | 40.1% |
| Apollo Global Management | APO | 62.8% |
| Energizer Holdings | ENR | 15.6% |
| Vail Resorts | MTN | 29% |
| Nestle | NSRGY | 9.6% |
| ConAgra Foods | CAG | 5.4% |
| Post Holdings | POST | 17.9% |
| General Mills | GIS | 21.1% |
| —– | —– | —– |
| SPDR S&P 500 ETF | SPY | 19.7% |
| iShares U.S. Consumer Goods ETF | IYK | 20.8% |
The average return year-to-date for the 10 stocks in the portfolio is roughly 30%, which is about 10 percentage points better than both the SPY and IYK. Of the 10, six have outperformed the benchmarks, all but one by a considerable margin. More importantly, the six that have outperformed averaged a 44% return!
Individual Performances
Unfortunately for Bill Stiritz, Post Holdings is one of the laggards. You can blame this on the company’s ugly Q3 earnings report. But then again, the company is in the midst of a transition that is intended to build market share and diversify beyond ready-to-eat (RTE) cereals. It’s essentially sacrificing short-term profits to solidify its future cash flow.
The building of market share in RTE is a long and arduous battle involving increased marketing, advertising and promotion. It’s not won overnight, so don’t expect earnings to come back for the next few quarters. More important is its ability to generate cash flow.
Post’s debt has risen substantially since its separation from Ralcorp (RAH) in February 2012. Including its $370 million acquisition of the Dakota Growers Pasta Company announced Sept. 16, Post has spent $717 million moving into other areas of the food industry beyond cereal.
Still, while debt has increased, Post still generated $66 million in operating cash flow in the first three quarters of the year. In the Q3 conference call, CFO Robert Vitale indicated that its 2013 adjusted EBITDA would be at least $214 million, which suggests operating cash flow should be around $160 million. That’s less than 2012, but more than enough to pay its interest expense. In two to three years, I could see its EBITDA doubling, bringing POST stock along for the ride.
Patience is required here. Long-term, like everything Stiritz touches, you should be just fine.
As for the other stocks in the portfolio, you can’t ignore the performance of both Apollo (APO) and ITT Corp. (ITT).
It’s been a busy year for private equity firm Apollo Global Management, which got the Twinkie back on grocery store shelves in July. Carried interest income more than doubled in the first six months of the year to $1.4 billion.
As for ITT, its business is running smoothly. In early August while reporting Q2 results, it raised its guidance for the year, expecting organic revenue growth of at least 3%, total revenue growth of 10% and adjusted earnings per growth of approximately 12.5% over 2012.
Why Does It Work?
An associate of mine asked me the money question: “Why does the portfolio work?”
I’ve thought long and hard, and the best answer I can come up with is that Bill Stiritz is an exceptional person who holds the bar very high; any company he would be associated with, even just in passing, would also have to be exceptional. So, the fact that Stiritz has personally invested $250 million of his own money in Herbalife (HLF) tells you all you need to know about Bill Ackman.
Beyond my simple explanation, it’s hard to find anything really tethering the success of all 10 stocks, so by that measure it’s extremely difficult to guarantee that the results the Purina Portfolio has achieved in the past six months can be repeated in the next six.
But given the quality of these stocks, it’s hard not to expect good things.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
