I have been a bear on the food group since early this year. Overlapping trends of consumers shifting away from boxed and prepared foods, grocery stores cutting shelf space for these products and uber-cheap European competitors Aldi and Lidl entering the U.S., are destroying profits for the packaged food sector.

The trades:

Buy to open the December 15, 2017, put on Pinnacle Foods (PF) with a strike price of $55 at $1.75 or lower. Symbol (PF171215P55)

Buy to open the December 15, 2017, put on Post Holdings Inc. (POST) with a strike price of $85 at $2.20 or lower. Symbol (POST171215P85)

The Rationale:

Packaged food manufacturers are under increasing pressure due to weak demand from consumers and shrinking shelf space at grocery stores.

The downward spiral continues as consumer preference for fresh and prepared foods shifts dollars away from packaged foods. As grocery stores cut space for these products to make way for more popular items, orders to companies like Pinnacle and Post are hit hard.

Pinnacle’s (NYSE: PF) stock has performed better than other food stocks due to continued rumors of it being a takeover target. However, it is trading well above the highest valuations for recent food acquisitions.

Pinnacle purchased Boulder’s Brands, maker of Udi’s gluten-free pizza, in January 2016. Boulder’s sales were already declining single digits at that point and profits collapsing. Now that Pinnacle has worked through the magic of “one-time” deal charges, the true shape of its business should be apparent to investors.

The company reports its third quarter in the third week of October. Call details are below. Estimates incorporating single-digit increases in sales look too optimistic to me.

Post Holdings (NYSE: POST)  has been trying to bandage over its bleeding cereal business with massive acquisitions. In the past five months, it has announced over $3 billion of new deals, leaving little room to finance any more deals.

Its $1.8 billion purchase of British cereal maker Weetabix closed three days after the June quarter ended, so investors are not fully aware of Weetabix’s numbers. Post’s proposed $1.5 billion purchase of Bob Evans meat business has not closed yet.

The strategy of adding yet another cereal brand to a deteriorating portfolio doesn’t strike me as productive and I expect investors to be concerned when the poor sales trends for Post’s basic business are reported on its September quarter call mid-November.

The Conference Calls:

Pinnacle Foods September (Q3) Earnings Call:

Date: On or about October 25, 2017. Pinnacle announces the exact date two weeks before. I will alert you of that date as soon as it is available.

Time: 9:30 am (EST)

Call Details: Access to a live audio webcast and replay of the event will be available in the Investor Center section of the Company’s corporate website, www.pinnaclefoods.com.

What to Listen For:

1. How much, if at all, is sales of Boulder Brands growing?
2. How much was pricing up or down and how will the company produce higher profits in the face of price pressure?
3. Have they come up against Aldi and Lidl in any of their markets yet and if so, how have sales fared in those geographies?

Post Holdings September (Q4) Earnings Call:

Date: On or about November 15. Post announces the exact date one week before. I will alert you of that date as soon as it is available.

Time: 9:00 AM (EST)

Call Details:   Interested parties are invited to listen to the webcast of the conference call, which can be accessed by visiting the Investor Relations section of Post’s website at www.postholdings.com.

What to Listen For:

1. How much were Weetabix sales up or down in the most recent period?
2. What are the trends in the packaged cereal business and is Post gaining or losing shelf space in grocery stores?
3. What is the company’s plan to pay off its $9 billion debt balance? Interest payments already eat up more than one-third of earnings, what will that look like going forward?
4. Look for terms like “brand rationalization” which is code for grocery stores demanding brands deliver great sales to save their spots on the grocery shelf.