MAPLE LEAF FOODS INC. $14 (Toronto symbol MFI; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 127.6 million; Market cap: $1.8 billion; SI Rating: Average) is Canada’s largest supplier of fresh and frozen meat products, mostly under the Maple Leaf and Schneiders brands. It also makes animal feeds and owns 87.5% of Canada Bread Company, Ltd., which makes bread, pasta and sauces.
Maple Leaf’s revenue hovered around $5.0 billion from 2001 to 2003. In 2004, it acquired rival Schneider Corp. for $499 million. Consequently, revenue grew to $6.4 billion in 2004, and $6.5 billion in 2005.
Profits rose from $0.55 a share (total $57.4 million) in 2001 to $0.71 a share ($84.7 million) in 2002, but fell to $0.27 a share ($35.1 million) in 2003 due to restructuring costs. The Schneider acquisition helped lift earnings in 2004 to $0.89 a share ($102.3 million), but more restructuring costs cut profits in 2005 to $0.72 a share ($94.2 million).
Maple Leaf generates 25% of its total sales outside of Canada, and the higher Canadian dollar has squeezed its profit margins. Rising feed and energy costs have also hurt its profits.
Consequently, Maple Leaf recently unveiled a major plan to cut its exposure to the sometimes volatile fresh meat business, and focus instead on value-added food products. It will close five of its six hog processing plants, and sell most of its animal feed operations. The remaining operations will support the processed food businesses.
Transformation will take three years
Restructuring costs will total between $80 million and $120 million in the three years that it will probably take Maple Leaf to complete this transformation. But the plan should cut the company’s annual costs by $100 million.
The stock fell to $11 in August 2006, but moved up on news of the new strategy. It now trades at 21.9 times the $0.64 a share it probably earned in 2006, excluding unusual items.
At current prices, the company’s holding in Canada Bread is worth around $9.80 per Maple Leaf share. That means you get its other businesses for $4.20 a share, even though they supply 75% of its revenue. The $0.16 dividend yields 1.1%.
Maple Leaf Foods is a buy.