 Good day fair investors! One of the best ways to find bargain investments or great investments is to look for companies that don't have linear earnings. If a company's earnings go up and down, analysts don't know what to do, and even investors they don't know how to look at the metrics and therefore the stock price also goes up and down. One of the best examples of how a company can be wrongly understood is Apple. Apple is the most followed, most watched, most owned company in the world. However just a year and a half ago stock price was at 90 and now it is at 155. Tell me how come that such a big stock can have such great jumps? This is because analysts look only at what will happen the next quarter and if they can't see it they describe immediately the business as risky and degraded and vote against it. So if you look beyond the next quarter then you look further than 90% of analysts. So in this analysis we'll look beyond the next one, two quarter, beyond the next year and I'll describe you a very very good stock and the stock I'm going to describe you is Treehouse Foods. I'll discuss what does the company do. I will check the fundamentals, we'll check why it is a bargain, why is what's going on with the stock price and we'll see what are the catalysts that can really unlock the value in Treehouse Foods. So let's immediately start with describing the company. Treehouse Company is a private label food and beverage producer focused on customer brands and custom products from baked goods, beverage, condiments, healthy snacks, meals. So if you go to Target or whatever and you see a private label there is a chance that it was made by Treehouse Foods. The company has 1400 customers but it wants to lower it to 1100 and focus on the top 100 customers that make 90% of revenue. What's significant about the company is that the company is mainly growing through acquisitions in addition to organic growth and it has increased sales nine times in the last 12 years. That's a huge performance. After the 2016 acquisition of private brands they are now the private label leader in 20 of 32 categories and here we come to the reason why the stock price is a little bit depressed. Treehouse had margins above 20% in 2010 then they acquired RALCorp that lowered margins then in 2015 they acquired private brands and those margins when combined really lowered Treehouse's margin. However the management's goal is to take advantage of the synergies between Freehouse and private brands in order to increase margins by 300 basis points by 2020. If the management manages to do that it will be huge. If they don't it's also good because you will see later. So on the fundamental side here you can see the margins they used to be above 20% now they are 18.7% 300 basis point margin improvement on 6 billion in revenue would really be huge for the company. The acquisition doubled the revenue however it lowered the margins. Now a reason why this stock doesn't come up on screens and it's not research and perhaps many investors shun it is that it has negative earnings. These negative earnings are because of an impairment charge of 85 million on the sale of their soup division in the last quarter and a few quarters back they took a 352 million non-cash impairment charge or 6.19 dollars per share related to their flagstone foods 2014 acquisition that didn't work out as they planned. If we add the 430 million impairment charge non-cash to the current net income we would come to a net income of around 200 million. 200 million divided by 57 million shares is somewhere below four dollars per share which is very very good in this market. However there is something even better about Treehouse and something that I think makes Treehouse a very very good takeover candidate. If you look at the operating cash flow the trading operating cash flow is 566 million divided by 57 million shares that's around 10 dollars per share. Take off the capex the free cash flow is 383 million or about 6.71 per share so that gives a 10% free cash flow yield on the stock and that's something very attractive to a private fund or somebody that wants to take out this stock because they can buy it and if they can manage to have 300 million in free cash flows during the next few years which is what Treehouse offers if this business remains as is without improvements then it's a very very attractive takeover candidate and you can see that also as soon as the stock reaches something below 70 it quickly recovers as it's clear that it is a bargain. What does Treehouse do with the cash it uses to pay down the debt? In the last 12 months they paid down 274 million of debt so that shows how much free cash flow they have which is huge for such a company. They're really focused on paying down debt the lower is their debt they can then engage into new acquisitions to grow. The goal of Treehouse Foods is to become a 10 billion company so with the next acquisition maybe in one two years I'm sure they can get there and perhaps grow even further. There are some issues of course that's why the stock price is so low and analysts don't like this. In 2019 there will be facility closures seizing production at some plants close free facilities in 2018 Brooklyn Park Plymouth dot han and then further details on restructuring what is going to happen and when will be given only in February 2018 so if you're an analyst you cannot put this in your model and you don't know what to say about the company then it's better to say risky and then it's even better to say don't buy until the situation resolves itself however when the situation resolves itself the stock will be double. So if you're smart and if you like what you see buy now. Now what will happen as I said net income currently 2017 is around 180 million that comes out at free free something dollars per share which is good in this market however if we add the 300 basis point margin improvement we could add 200 million to pre-tax earnings 30 tax rate we get 140 million if we add it to the lower guidance here of 180 million we get to around 320 million in net income by 2020 without any new acquisition which leads to 5.61 dollars per share that is price earnings ratio of around 12. Of course something can go wrong with the management's plans but I think then somebody will take over the company so there is a margin of safety in the huge cash flows and in the attractiveness on the company it's private label it's food so it's defensive for whatever happens into the economy so very important to see it from that perspective the 5.61 earnings with the price earnings ratio of 25 which is normal for the current market would see the company at 140 as a target price in 2020 and the stock price is now low because there is expected to be more restructuring in the next few quarters when the restructuring passes then people will look what will happen in 2019 and then they will see growth and then the stock price will rise so if you want to position yourself before that now is the time just a quick look at the private label industry here Robert Quarofford from McGuire Woods made an analysis 120 billion is the market in private label and the biggest player is then Treehouse with 6 billion does 5 percent of the market this means that consolidation economies of scale there will be huge consolidation in the industry and if a stock is cheap it will be a target what's also very important Amazon is coming in with a private label Lidl Aldi the German groceries that are spreading havoc around the grocery land in US alongside Amazon also are very strong with private labels so we might expect growth in that industry in the future as it has been the case in the past the growth isn't as high as in Europe where everybody's crazy about private labels but the market is there to stay I think so I hope you liked the analysis please let me know what you think about it in the comments where I might be wrong what are the risks so that we give a better perspective to our viewers thank you for watching consider subscribing there will be plenty more stock analysis click like if you like the content and I'll see you in the next video