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March 25, 2005

Analyst: Raymond Kwan Ian Madsen, MBA, CFA, Editor

1-800-767-3771, x417; imadsen@

155 North Wacker Drive ( Chicago, IL 60606

Ralcorp Holding Inc (RAH-NYSE) – $46.10

Overview

Ralcorp Holdings, Inc. engaged in the manufacturing, distribution and marketing of store brand (private label) food in the grocery, mass merchandise, drug and foodservice channels. The products include: ready-to-eat and hot cereal products; store brand and branded crackers and cookies; store brand and value branded snack nuts and chocolate candy; store brand wet-filled products, such as salad dressings, mayonnaise, peanut butter, syrups, jams and jellies, and specialty sauces; foodservice and branded frozen griddle products and biscuits, and foodservice and store brand breads, rolls and muffins. The business is comprised of four reportable business segments: Cereals, Crackers and Cookies (consisting of Ralston Foods and Bremner, Inc.); Dressings, Syrups, Jellies and Sauces (The Carriage House Companies, Inc.); Snack Nuts and Candy (Nutcracker Brands, Inc.), and Frozen Pancakes, Biscuits and Breads (Bakery Chef). On March 1, 2004, it announced the purchase of Concept 2 Bakers. The Company’s head office is located in St. Louis, MO with employees totaling 6,000. Additional information about the company can be found at

Analysts have identified the following factors for evaluating investment merits of RAH.

|Key Positive Arguments |Key Negative Arguments |

|Kellogg and General Mills both have stated that private label companies such|Significant cost inflation particularly in packaging and fuel may challenge |

|as RAH are expected to gain additional cereal market share going forward. |margins in 2Q’05. |

|Company generated 20% YoY gains in RTE cereal volumes in 1Q’05 due growing |The performance at Carriage House and Snack Nut were disappointing to most |

|retail customers and market share gains. |analysts due to significant freight and packaging costs offset by higher |

|RAH reported 1Q’05 EPS of $0.55 per share, $0.06 above the streets |price realization. |

|consensus. |RAH has been unable to raise cereal prices, which may create competitive |

|Ralcorp may be a beneficiary of Wal-Mart’s possible development of private |issues in the private cereal brand space. |

|market opportunities, particularly in categories such as ready-to-eat | |

|cereal, salad dressing, and mayonnaise. | |

|Analysts applaud management financial discipline of not overpaying for | |

|acquisitions. | |

|RAH’s cookie division generated ~25% volume growth due to the recent | |

|Bake-Line bankruptcy. | |

Ralcorp Holding Inc. posted exceptionally solid 1Q’05 results. EPS was $0.55 per share, six cents higher than the street consensus of $0.49 per share. Revenues jumped 21% from a year prior to $440.1MM, while gross margins expanded by 66 basis points to 20.1%. The strong quarterly results were attributed to robust volume growth in the Cereal, Crackers, & Cookie division coupled with double-digit sales growth in the Frozen Bakery segment. Offsetting these positive items were higher freight and input costs as well as a $2.2MM increase in interest expense related to the acquisition of Bakery Chef and Concept 2 Bakers. Overall, the consensus for RAH is positive. Most analysts believe the Company will be a long-term beneficiary of secular trends toward private label foods and therefore expect RAH to be trading at a much higher price in the next 12-18 months.

Revenues

Total Revenues

|Fiscal Year Ends: September |1Q05A |2Q05E |3Q05E |4Q05E |FY2005E |FY2006E |

|$ in millions | | | | | | |

|Digest High |440.1 |419.5 |422.6 |438.3 |1,716.7 |1,745.0 |

|Digest Low |440.1 |397.0 |397.3 |434.5 |1,670.0 |1,715.2 |

|Digest Average |440.1 |407.2 |406.4 |436.2 |1,690.6 |1,730.1 |

|Digest Average YoY Growth |21.41% |6.20% |5.21% |2.34% |8.49% |2.34% |

Analysts are forecasting +8% revenue growth for FY2005 as the Company continues to benefit from strong sales and volume growth from Ralton Foods and Brenmer, respectively. The Company is also expected to see incremental volume growth in the cookie/cracker division due to the recent bankruptcy of a major cookie/cracker competitor (Bake-Line). Meanwhile, sales growth for the Snack Nuts and Candy and Frozen Pancakes, Biscuits and Breads segments are projected to be in the double-digits going forward due to new distribution to key customers in Nutcracker division and the inclusion of $6-$7MM in revenue from Concept 2 Baker in the Frozen Bakery Products segment.

Please refer to Zacks Research Digest spreadsheet for specific revenue estimates.

Margins

| |FY2004A |FY2005E |FY2006E |Trend |

| | | | |(up/down) |

|Gross Profit Margins |20.61% |20.79% |20.82% |UP |

|Operating Profit Margins |7.51% |8.04% |8.40% |UP |

Operating and gross profit margins for FY2005 are expected to jump by 53 and 18 basis points from ’04 levels, respectively. Lower SG&A costs offset by higher fuel and cost inflation are the main drivers attributed to the higher expected margins going forward.

Please refer to Zacks Research Digest spreadsheet for more details on margin estimates.

Earnings Per Share

|Fiscal Year Ends: September |1Q05E |2Q05E |3Q05E |4Q05E |FY2005E |FY2006E |

|$ in millions | | | | | | |

|Digest High EPS |0.55 |0.71 |0.91 |0.53 |2.62 |2.87 |

|Digest Low EPS |0.55 |0.63 |0.84 |0.49 |2.57 |2.83 |

|Digest Average |0.55 |0.68 |0.86 |0.51 |2.60 |2.85 |

|Digest Average YoY Growth |36.14% |28.20% |3.37% |12.95% |17.15% |9.91% |

Please refer to Zacks Research Digest spreadsheet for more extensive EPS figures.

Target Price/Valuation

Target prices for RAH range from $47.00 to $50.00 with an average model price of $48.75. The upper bound is established by a combination of discounted cash flow, P/E multiple, and EBITDA multiple, while the lower bound is determined using 5-10% discount to 11x packaged food group EV/LTM EBITDA (adjusted for Vail stake).

Please refer to Zacks Research Digest Spreadsheet for further details on valuation.

Long-Term Growth

Long term growth for RAH ranges from 7% to 10%. Majority of this growth is expected to be derived from positive private label market trends as well as “bolt on” acquisitions particularly in the Frozen Bakery Products and Cereal, Crackers, & Cookies divisions. Longer term, analysts believe private labels brands at Wal-Mart represent a huge growth opportunity. According to one analyst (Lehman Brothers), Wal-Mart has been in the past quite passive to private labels in order to draw customers to well-known brand names at low cost. However, given the relative quality improvement of private labels as well as the possibility higher margins, analysts believe Wal-Mart may actively seek opportunities to introduce private label where well-know brands will not be undermined. If Wal-Mart would seek such prospects, Ralcorp would be a direct beneficiary. Currently, Wal-Mart represent approximately of 14% of Ralcorp’s 2004 revenues.

Individual Analyst Opinions

POSITIVE

Banc of America – The stock is rated BUY with a $50.00 price target. Analyst believes Ralcorp has a competitive advantage over its private label peers due to the Company’s array of “private label offerings” that can give retailers a complete brand solution at the lowest cost. The analyst also sees the trend towards private label foods continuing at a furor pace, which should aid the Company in incremental market share gains.

CSFB – The stock is rated OUTPERFORM with a $50.00 price target. Firm sees positive synergies between the amalgamation of Bakery Chef, Lofthouse, Cascade, and Concept 2 Bakers in the Frozen Bakery division going forward. Additionally, the analyst believes a possible acquisition in the food services division is on the horizon.

Lehman Brothers – The stock is rated 1-OVERWEIGHT with a $48.00 price target. Analyst believes the fallout in low-carb trends will not benefit RAH’ co-branding volumes to the extent as initially anticipated. Going forward, the analyst sees co-packaging will range between 3-7% of sales on average for the Cereal, Crackers, and Cookies division.

Wachovia Securities – The stock is rated OUTPERFORM with a price target range of $45.00 to $49.00. Firm rates RAH as one of their “top” picks given easy comps, strong private label market outlook, and the possibility of industry consolidation.

NEUTRAL

AG Edwards – The stock is rated HOLD with no given price target. Analyst believes RAH will resort to further acquisitions in order to boost growth going forward or may resort to a one-time special dividend in lieu of acquisitions. Nevertheless, the analyst believes the company is fully valued at current levels given risks concerning cost inflation and limited pricing movement.

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Research Digest

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