Maple Leaf Foods Inc. $13 – Toronto symbol MFI

MAPLE LEAF FOODS INC. $13 (Toronto symbol MFI; Conservative Growth Portfolio, Consumer sector; SI Rating: Average) is one of Canada’s largest food processing companies. It makes fresh and frozen meat products under the “Maple Leaf” and “Schneiders” brand names. It also supplies animal feeds and other agricultural services to farmers, and owns 87.5% of Canada Bread.

The company’s revenue rose from $4.8 billion in 2001 to $5.1 billion in 2002, but slipped to $5.0 billion in 2003. In 2004, Maple Leaf paid $499 million for rival meat processing company Schneider Corp. Consequently, revenue grew to $6.4 billion in 2004, and to $6.5 billion in 2005.

Income rose from $0.55 a share (total $57.4 million) in 2001 to $0.71 a share ($84.7 million) in 2002. Restructuring costs cut Maple Leaf’s profit in 2003 to $0.27 a share ($35.1 million), but income improved to $0.89 a share ($102.3 million) in 2004.

In 2005, higher energy prices and costs related to a new restructuring plan cut profit to $0.72 a share ($94.2 million).

Canada accounts for roughly 75% of Maple Leaf’s revenue, so it’s less vulnerable than other companies to the rising Canadian dollar. However, it’s a major exporter of pork to Japan, and a sudden drop in the Japanese yen hurt Maple Leaf’s profit margins in 2005. The company has hedged some of its Japanese sales in 2006 to cut its currency risk.

Maple Leaf is also vulnerable to consumer concerns over avian flu, mad cow disease and other food safety issues. It buys most of its raw materials from independent suppliers, and it is expanding testing to cut this risk.

In March 2006, Maple Leaf’s stock price fell from $17 to $13 on news of more restructuring costs. It now trades at 15.1 times the $0.86 a share it should earn in 2006 before unusual items. The $0.16 dividend has a yield of 1.2%.

Canada Bread, which we view as a buy (see above) accounts for around 40% of Maple Leaf’s profit. Based on current prices, Canada Bread now accounts for about $10.60 per Maple Leaf share. That means you get Maple Leaf’s other businesses for less than $3 a share, even though they contribute 60% of Maple Leaf’s profit.

That means these other businesses trade at roughly 6.0 times their earnings contribution. That’s cheap. While they lack Canada Bread’s growth record, these businesses do offer well-known brands, high market share and a lot of growth potential.

Maple Leaf Foods is a buy.

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