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Federal Reserve Chair Jay Powell suggested that the Fed could resume interest rate cuts soon.
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With a 4.2 times debt-to-EBITDA level, TreeHouse Foods would see some relief from lower rates.
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However, rate cuts are by no means assured, and the company's debt load remains a risk.
Shares of private label food manufacturer TreeHouse Foods (NYSE: THS) rallied double digits on Friday, appreciating 10.5% as of 1:21 p.m. ET.
Today, Federal Reserve Chair Jay Powell appeared to hint at interest rate cuts in the months ahead. The prospect of rate cuts led to a bout of buying and short covering in many rate-dependent stocks. As a highly indebted name, TreeHouse was no exception.
At the end of the pandemic, inflation jumped and the Federal Reserve hiked interest rates at the fastest pace in history. But while the Fed began cutting the federal funds rate last year, the last rate cut was in December. Since then, inflation has remained stubbornly above the Fed's target, causing the central bank to pause those cuts while keeping the funds rate “moderately restrictive” at 4.5%.
Today in a speech at Jackson Hole, Wyoming, Powell said, “the balance of risks appear to be shifting.” What that means is that Powell currently sees as much risk to the job market as there is to inflation. That appeared to suggest more rate cuts could be coming in the months ahead, even as inflation remains above-target.
The markets took this hedged message enthusiastically, leading to a big jump in economically sensitive stocks. That included TreeHouse, given its high debt load.
At the end of the second quarter, TreeHouse had about $1.5 billion of debt and little cash, relative to its 2025 earnings before interest, taxes, depreciation, and amortization (EBITDA) guidance of $360 million. That's about a 4.2 times leverage ratio, which is somewhat high. The company's interest expense was also $22.2 million last quarter, up 42% from last year.
So, the prospect of lower interest rates on that debt, along with perhaps more consumer spending due to lower rates, could help TreeHouse's financials in the year ahead.
With its stock down 45% this year and the prospect of lower rates on the horizon, TreeHouse could be an interesting opportunity. Shares trade at about 11 times this year's earnings estimates. And while the company's debt poses a risk, continued debt paydown could lessen that risk and spur a rerating.
