Maple Leaf Foods Inc. $11 (Toronto symbol MFI Conservative Growth Portfolio, Consumer sector; Shares outstanding: 126.9 million; Market cap: $1.4 billion; SI Rating: Average) is Canada’s largest food processing company. Its products include fresh and prepared meats and poultry, mostly under the Maple Leaf and Schneider brands. It also makes fresh and frozen bakery products through 89.8%-owned Canada Bread Co. Ltd. Maple Leaf is currently in the middle of major restructuring that will see it focus on more-profitable packaged meats and meals. In the past two years, it has sold its animal feed operations and scaled back its hog-processing operations. The company is also investing heavily in new plants and equipment. It will probably take Maple Leaf another few months before it starts to realize the full benefits of its plan. Meanwhile, sharply higher prices for grains and energy continue to hurt its profitability. Exports account for about 30% of the company’s sales, and the stronger Canadian dollar also makes its products more expensive outside of Canada.Maple Leaf’s sales rose from $4.2 billion in 2003 to $5.6 billion in 2005, but fell to $5.2 billion in 2007. Earnings before unusual items grew from $0.04 a share (total $83 million) in 2003 to $0.59 a share ($201 million) in 2005. Earnings fell to $0.38 a share ($173 million) in 2006, but improved to $0.51 a share ($199 million) in 2007. In the three months ended June 30, 2008, Maple Leaf lost $0.07 a share (total $9.4 million) compared to a loss of $0.05 a share ($6.5 million) a year earlier. If you exclude restructuring costs, it lost $0.01 a share compared with a profit of $0.13 in the year-earlier quarter. Sales rose 3.0%, to $1.36 billion from $1.32 billion. Maple Leaf has increased its selling prices, but it will take a few months to offset its higher input costs.
Cost savings should begin in 2009
The company estimates that the restructuring will eventually cost it $275 million to $325 million. It has already incurred $208.9 million of those restructuring costs. However, the plan should save Maple Leaf at least $100 million a year, starting in 2009. Maple Leaf’s long-term debt of $1.1 billion is a high 80% of its market cap. However, lower costs will help free up cash for debt repayments. Maple Leaf holds cash of $16.4 million ($0.13 a share). The stock trades at 36.7 times Maple Leaf’s projected 2008 earnings of $0.30 a share. However, earnings could rise to $0.55 a share in 2009, which implies a more reasonable p/e of 20.0. The $0.16 dividend yields 1.5%. Maple Leaf Foods is a buy.
