Maple Leaf Foods Inc. $15 - Toronto symbol MFI

MAPLE LEAF FOODS INC. $15 (Toronto symbol MFI; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 128.6 million; Market cap: $1.9 billion; SI Rating: Average) makes fresh and frozen meat products, mainly under the Maple Leaf and Schneiders brands. It also owns 88.0% of Canada Bread Company (see box at right). The company is currently restructuring its operations to focus on value-added products, which generate higher profits than fresh meat. Consequently, it recently closed two pork processing plants and will close a third later this year. In the second quarter of 2007, Maple Leaf’s revenue fell 2.9%, to $1.32 billion from $1.36 billion a year earlier. However, earnings from continuing operations and excluding restructuring costs grew 8.3%, to $0.13 a share (total $52.7 million) from $0.12 a share ($46.8 million). Due to its planned exit from the fresh meat business, Maple Leaf no longer needs its animal feed business. In July 2007, it sold these operations for $512 million. The company expects to record an after-tax gain of $1.50 a share on the sale. Maple Leaf will use $400 million of the proceeds to pay down its long-term debt of $1.3 billion (1.3 times equity). It will take Maple Leaf two more years to complete its restructuring, and cost it between $165 million and $215 million. But the plan will improve its long-term profitability. Maple Leaf exports most of its fresh meat products, so the shift to value-added products will also cut its exposure to the rising Canadian dollar. Maple Leaf’s stock has gained a third in the past year, and now trades 21.1 times the $0.71 a share it should earn in 2007. But earnings should rise to $0.90 in 2008, which implies a more reasonable p/e of 16.7. The $0.16 dividend yields 1.1%. At current prices, Canada Bread represents roughly $10.40 per Maple Leaf share. That means you can buy Maple Leaf’s other businesses, which supply 70% of its revenue, for about $5 a share. Maple Leaf Foods is a buy.