MAPLE LEAF FOODS INC. $9.37 (Toronto symbol MFI; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 136.8 million; Market cap: $1.3 billion; Price-to-sales ratio: 0.2; Dividend yield: 1.7%; SI Rating: Average) is Canada’s largest food-processing company. It mainly makes its products, which include fresh and prepared meats and poultry, under the Maple Leaf and Schneider brands. Maple Leaf also owns 89.8% of Canada Bread.

Maple Leaf’s strong brands and customer loyalty are helping it continue its recovery from a 2008 listeriosis outbreak at its Toronto meat-processing plant. These strengths should also help it pass along higher costs for pork and other ingredients to its customers over the next few months.

In the three months ended March 31, 2010, Maple Leaf’s sales fell 6.9%, to $1.2 billion from $1.3 billion a year earlier. That’s mainly because of a 7.5% drop in sales of frozen baked goods. As well, Maple Leaf gets 23% of its sales from outside of Canada, and the higher Canadian dollar hurt the contributions of its foreign operations.

Despite the lower sales, earnings jumped 204.9% in the quarter, to $8.8 million, or $0.06 a share. Maple Leaf earned $2.9 million, or $0.02 a share, a year earlier. If you exclude costs related to Canada Bread’s plan to close three older bakeries in Toronto and shift their production to a new $100-million plant in Hamilton, Ontario, earnings per share rose 80.0%, to $0.09 from $0.05.

The company continues to move away from fresh meats and toward processed foods, such as precooked, ready-to-eat pot roasts and chicken dinners. These foods generate higher profit margins than fresh meats. Maple Leaf has also introduced new products, such as deli meats made with all-natural ingredients and no preservatives. These new foods should further spur its profits.

Maple Leaf’s strong balance sheet is also a plus. Its long-term debt of $831.9 million is a manageable 64% of its market cap. About 57% of its debt is at fixed rates. That will help shield the company if interest rates rise this year, as we expect. As well, it holds cash of $72.3 million, or $0.53 a share.

The company will probably report 2010 earnings of $0.72 a share. The stock trades at 13.0 times that estimate. At current prices, Maple Leaf’s stake in Canada Bread is worth roughly $7.85 per Maple Leaf share. That means you get Maple Leaf’s meat-processing operations, which account for 64% of its revenue, for just $1.52 a share.

Maple Leaf Foods is a buy.