Ralcorp Holdings: Stock the pantry

Around that storied kitchen table, consumers know that saving pennies adds
up to meaningful dollars. Just ask shoppers who stock their pantry with
goods from Ralcorp Holdings (NYSE:RAH), which has scurried to the top shelf
as consumer attitudes drop to the floor.

Frugal buyers get a full-brand breakfast from St. Louis-based Ralcorp, with
cereal (it owns Post as well as value brands), frozen pancakes, French
toast, syrup and jams. Snacks include Nutcracker and Flavor House nuts
and candy, and cookies and crackers come from its Bremner Foods Group unit,
which includes Ry Krisp.

That's not all. For investors, Ralcorp has served up a 28% gain from an
early July low at $48.08 to Friday's close at $65.77. It has a year-to-date gain
of 8%, compared with a loss of 3.7% in much larger competitors' Kellogg Co.
(NYSE:K) and loss of 12.2% at Kraft Foods (NYSE:KFT). Ralcorp's market
capitalization is $1.7 billion.

Ralcorp, known as a store-brand food manufacturer and supplier, has tied
together a string of annual revenue gains through acquisitions -- seven since
mid-2005 -- and internal growth. In August, it made its largest acquisition,
buying the Post brand from Kraft Foods. By adding such a recognizable name,
Ralcorp is tipping its business mix toward national brands and balancing its
value brands with name items.

Sales have grown to $2.2 billion in fiscal 2007 from $1.3 billion in 2003.
Post is expected to add another $1 billion in annual revenue and to be
accretive in 2009. Ralcorp sells to retail chains, mass merchandisers,
grocery wholesalers, restaurant chains and foodservice distributors in the
United States and Canada. Wal-Mart Stores (NYSE:WMT) takes about 15% of
sales.

In the Post transaction, about 30.5 million Ralcorp shares were issued,
which S&P analysts say resulted in Kraft shareholders owning an interest
of 54% in Ralcorp. The company also assumed $964.5 million of debt. For the
third quarter through June, Ralcorp had total debt of $688 million and total
cash of $85 million.

Analysts expect Ralcorp to earn $3.60 per share in fiscal 2008, up from
$3.25 the previous year and from $0.25 in 2003. Earnings are predicted at
$4.21 in 2009; S&P foresees a 8% compound annual growth rate in the next
three years. At Friday's close of $65.77, Ralcorp's P/E was 14.6 based on
2009 expectations.

Ralcorp shares are benefiting from price-sensitive consumers and the
accretive notions for the Post cereal business. But Ralcorp also has 19%
ownership in Vail Resorts, Inc. (NYSE:MTN). Aside from toss-of-dice
seasonality, Vail pivots on discretionary spending, and this can jostle
Ralcorp's quarterly results. Let it snow.

Commodity and energy price swings also sway Ralcorp, which uses lots of
sugar, oats, wheat, soybean oil, corn sweeteners and nuts, not to mention
glass containers and plastic packaging. Energy costs affect transportation
and operational expenses.

Ralcorp has a balanced business and track record of success. In the
pantry -- or the portfolio -- save a little room for Ralcorp.

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