Treehouse Foods (THS) Calls +200% Since This Note to Clients

(This fundamental note to clients was issued on April 28 with stock trading at $87.50. Stock +12% since and June 90 calls +200%)

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Treehouse Foods (THS) – Is this going to pop through $90 next week when it reports on May 5 before market opens? Name that rarely appears on my radar. Unusual buyer of 291 June 90 calls for $2.65 offer this morning. Small but noteworthy approx $77,000 bullish bet.

Here is some interesting out of box thinking that you may not know. As well telegraphed, THS is in the process of integrating ConAgra’s PL business after closing the acquisition in early 2016. Research points to moderate dilution in FY2016, followed by major synergies to be realized in FY2017 that takes EPS to $3.95 (+30% YoY growth) followed by more synergies in FY2018 that takes EPS to $5.49 (+39% YoY growth). Meaning, expect the growth rate to really accelerate in coming quarters.

But there is a bigger missing piece here not baked into estimates: The coffee business. If partners such as Starbucks decide to leave GMCR (something that has been rumored in the past), THS could be in position to add as much as $2.35 EPS to bottom line, which is significant when you consider $3.95 EPS power in FY2017 estimate. The likelihood of such move is relatively high and when factoring in even just one quarter of such optionality, actual earnings could beat EPS expectations by as much as 20% this year. Add the whole year’s worth of optionality and numbers go sharply higher.