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Del Monte Foods Co. $11 – New York symbol DLM

DEL MONTE FOODS CO. $11 (New York symbol DLM; Aggressive Growth Portfolio, Consumer sector; WSSF Rating: Extra risk) makes a wide variety of canned fruit and vegetables.

In December 2002, Del Monte acquired Heinz’s seafood, baby food, pet food and private label soup businesses. The company felt these operations would broaden its product line, and help it compete with larger food companies.

However, some of the new operations did not perform as well as Del Monte hoped. As part of a new restructuring plan, Del Monte sold some of the slow-growth businesses like baby food and soups. It used the cash to expand its pet food operations.

In 2006, it spent $580 million for the Milk-Bone dog biscuit business, and $705 million for the Meow Mix cat food brand. Pet foods now account for 40% of Del Monte’s sales.

Thanks to the new operations, sales in its second fiscal quarter ended October 29, 2006 rose 12.6%, to $893.5 million from $793.2 million a year earlier. Without the new businesses, sales fell 1.6%.

Restructuring costs cut income from continuing operations by 33.3%, to $0.12 a share (total $23.7 million) from $0.18 a share ($37.3 million). If you disregard unusual items, Del Monte would have earned $0.18 a share in the latest quarter, unchanged from a year earlier.

We think Del Monte’s new focus on pet food makes sense. The company earns higher profits on pet foods than its other products, and Milk-Bone and Meow Mix are among the industry’s best-known brands.

The acquisitions increased Del Monte’s long-term debt, from 0.9 times at the end of previous fiscal year to 1.5 times. But the cash flow from these new businesses should help it cover the extra interest costs.

The stock has made little progress in the past three years. But it is reasonably priced at 15.3 times its forecast earnings of $0.72 a share, and at 71% of its sales of $15.60 a share. The $0.16 dividend yields 1.5%.

Del Monte is a buy for long-term gains.

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