Ralcorp (NYSE: RAH) is the nation’s largest producer of private label foods, supplying grocery stores and foodservice operations across the country. Handling all aspects of private label food production from custom package design to production and marketing, Ralcorp is the acknowledged low-cost producer in the industry and boasts Wal-Mart (NYSE: WMT) as one of its largest customers.

Though the company sports four operating divisions–cereals, frozen bakery products, snacks and sauces and spreads–the cereal segment is by far the largest, accounting for more than half of the firm’s net sales.

Having closed 20 deals since 1997, Ralcorp has long pursued an aggressive acquisitions strategy to fuel growth. Last August the company moved boldly to increase its cereal market share and gain substantial exposure to the branded food business, purchasing Post Cereals from Kraft Foods (NYSE: KFT) in a deal valued at $2.6 billion. The third-largest seller of ready-to-eat cereals in the nation, Post more than doubled the size of Ralcorp’s cereal business and was immediately accretive to earnings, adding more than $1 billion to annual sales.

The company intends to build on that solid base in branded foods through organic growth and further acquisitions, with the first step being the addition of four new Post brands over the next year.

Despite a tough market environment in 2008, sales growth for all of Ralcorp’s divisions was impressive, even as higher commodity and fuel prices squeezed margins. With ingredients accounting for 46 percent of its costs, Ralcorp relied on hedging transactions such as futures and swaps to dampen the effects of rising commodities prices.

Ralcorp has also aggressively cut costs by refining processes and realigning operations, closing one plant in Massachusetts last year and moving its operations to an expanded facility in Alabama. It’s also working to reduce the packaging associated with its products, which will ultimately lower production and transportation costs.

These measures have paid off: Last year the company enjoyed a 5-percent increase in earnings per share (EPS). Analysts expect Ralcorp to fall short of that level this year–current EPS estimates hover around $4.34–reflecting expectations that commodity costs could increase later in the year.

There’s also some risk that Ralcorp might run into trouble integrating the Post operations. The company currently has a transitional services agreement with Kraft Foods, which remains involved in some of the production and most of the distribution responsibilities. However, management reports that it’s on track to complete the merger later this year.

Despite these risk factors, Ralcorp looks like a great deal; the stock trades at a price-to-earnings ratio of 12.4, near its decade low and a full point below the industry average. Its share price is just 1.3 times book value, its lowest point in more than 10 years.

Retailers are also putting more effort into promoting their store brand products, on which they realize significantly higher margins–that should translate into impressive opportunities for manufacturers of private label foods. Given the increased promotional efforts on the part of retailers and the stock’s attractive valuation, Ralcorp is an excellent long-term holding.

WHY TO BUY
RALCORP (NYSE: RAH, $59.29)
o Increasingly value-conscious consumers
o Greater promotion of store brands
o Aggressive growth strategy