Shares of Ralcorp Holdings Inc. tumbled Tuesday, a day after the cereal maker announced an acquisition worth more than $1 billion and gave an outlook below expectations for its fiscal third quarter.
The St. Louis maker of private label foods and Post cereals said Monday it will buy American Italian Pasta Co. for about $1.2 billion, in addition to buying two cracker makers. The company forecast a drop in third quarter earnings per share because of heightened competition.
Ralcorp is a major food maker and has been gaining strength amid the recession, which spurred shoppers to seek private label brands to save money. But now it's saying that there's more competition and it has to offer promotions to entice shoppers — meaning they're becoming even pickier in what they buy.
The $1 earnings per share guidance for the third quarter — below the Street's $1.29 a share estimate — shows that branded cereal makers are cutting prices to win back share, said Janney Capital Markets analyst Jonathan Feeney. Longbow Research analyst Alton Stump cut his target price for the stock to $71 from $79 based on the lower margins from the cereal business. Standard & Poor's ratings agency placed the company's ratings on hold pending a review, saying the buyout of the pasta company could weaken Ralcorp's credit profile because of the debt it will most likely take on to pay for the deal.
Shares of Ralcorp fell $1.55, or 2.7 percent, to $55.73 on heavy volume late Tuesday afternoon. Shares have traded in the past 52 weeks between $52.66 and $69.86.
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