maple leaf foods

The stock market downturn of 2008/2009 renewed investor interest in food stocks. That’s because food is a necessity of life, and food producers’ shares are much less volatile than those of cyclical companies, such as resource firms. To increase your returns and cut your risk, you should focus on food makers with strong brands, such as the three we analyze below. The popularity of their brands makes it easier for them to launch new products and expand their market shares. As well, all three have strong balance sheets that are letting them make acquisitions and build new plants. However, only two are buys right now. SAPUTO INC. $35 (Toronto symbol SAP; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 207.9 million; Market cap: $7.3 billion; Price-to-sales ratio: 1.3; Dividend yield: 1.8%; SI Rating: Average) is Canada’s largest producer of dairy products, including milk, butter and cheese. The company also makes snack cakes and tarts. Aside from Saputo, its main brands include Neilson, Stella and Dairyland. The company also has operations in the U.S., Argentina and Europe....

MAPLE LEAF FOODS INC. $9.61 (Toronto symbol MFI; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 136.8 million; Market cap: $1.3 billion; Price-to-sales ratio: 0.3; Dividend yield: 1.7%; SI Rating: Average) rose 5% in August after the Ontario Teachers’ Pension Plan sold some of its Maple Leaf shares to private equity fund West Face Capital Inc. at $8.25 a share. West Face now owns about 11.0% of Maple Leaf. The pension plan will hold on to its remaining 25.2% stake for now. West Face has a history of unlocking value in companies, so its involvement should help spur Maple Leaf’s share price. Maple Leaf Foods is a buy.

PENGROWTH ENERGY TRUST, $9.76, Toronto symbol PGF.UN, has agreed to buy the 82% of Monterey Exploration Ltd. (Toronto symbol MXL) that it doesn’t already own. The deal should close in September 2010. Monterey produces oil and natural gas at properties in Alberta and British Columbia. Pengrowth is particularly interested in Monterey’s unconventional gas holdings in northeastern B.C. Monterey lacks the financial resources to develop these assets. That’s why it accepted Pengrowth’s offer. The trust will pay $366 million in units to take full control of Monterey. That includes $30 million of Monterey’s debt, which Pengrowth will assume....

MAPLE LEAF FOODS INC. $9.27 (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) slumped 4% on June 8, on news that the Ontario Teachers’ Pension Plan plans to sell its 35.3% stake in the company. Investors worry that some hidden problem has prompted the pension plan to sell Maple Leaf. The McCain family, which owns 31.6% of Maple Leaf, seems uninterested in buying the Teachers’ stake. However, major investors sell major investments (or choose not to buy out partners who want to sell) for a variety of reasons. The Teachers pension plan has been shifting away from common stocks and into real estate, foreign companies, private companies and other investments for a decade. Canadian stocks formerly made up a majority of the plan’s holdings. Now they represent 9%. Maple Leaf is the plan’s biggest single holding of a listed company. It bought more Maple Leaf as recently as late 2008....

BANK OF MONTREAL, $61.70, Toronto symbol BMO, gained 6% this week after it reported quarterly earnings that were far ahead of the consensus estimate of $1.10 a share. In its second quarter, which ended April 30, 2010, the bank’s earnings jumped 108.1%, to $745 million from $358 million a year earlier. Earnings per share rose 106.6%, to $1.26 from $0.61, on more shares outstanding. Revenue climbed 14.8%, to $3.0 billion from $2.7 billion. Trading volumes have recovered with global stock markets. That pushed up earnings at the bank’s capital-markets division by 38%, to $259 million. As well, low interest rates continue to spur strong demand for loans. As a result, earnings at Bank of Montreal’s Canadian retail-banking division rose 16% to $396 million....

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....

Food ingredient costs have been rising, and that’s starting to weigh on these four food companies. However, all four have strong brands and loyal customers. That should let them pass on most of these extra costs. These companies have also been finding ways to improve their productivity. We like all four, but only three are buys right now. TIM HORTONS INC. $34 (Toronto symbol THI; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 176.2 million; Market cap: $6.0 billion; Price-to-sales ratio: 2.7; Dividend yield: 1.5%; SI Rating: Average) is one of Canada’s largest fast-food restaurant chains. Its 3,015 outlets mainly serve coffee and donuts. The company also has 563 stores in the U.S. Franchisees operate 99.5% of Tim Hortons’ coffee-and-donut shops. The company gets about two-thirds of its revenue from supplying these outlets with coffee, baked goods and related items. (Rents and franchise fees account for the remaining third of its revenue.) Tim Hortons owns its own bakeries and warehouses. That gives it strong quality control, and lets it use its buying power to negotiate better ingredient costs....

As part of our investing strategy, we put a lot of importance on the amount of goodwill that a company carries as an asset on its balance sheet. Goodwill is an accounting entry that reflects the price that the company paid for its acquisitions, minus the value of the tangible assets, like land and equipment, that it received as part of the acquisition. The term means “value as a going concern.” However, goodwill acquired in an unwise acquisition can lose value overnight. When that happens, the company has to write it off against earnings. At worst, the company might have to write off most, if not all, of its goodwill....

Maple Leaf Foods has recovered nicely since it fell to $6.54 in October 2008 following a listeriosis outbreak and a massive recall of meat products. Since the recall, the company has been settling lawsuits and investing in new food-safety equipment and procedures. These costs have weighed on its recent earnings. However, Maple Leaf’s long-term outlook is improving, thanks to its focus on more profitable products. It will also gain from subsidiary Canada Bread’s recent cost cuts. We still prefer Maple Leaf to Canada Bread for new buying. MAPLE LEAF FOODS INC. $11 (Toronto symbol MFI; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 131.0 million; Market cap: $1.4 billion; Price-to-sales ratio: 0.3; Dividend yield: 1.5%; SI Rating: Average) is Canada’s largest food-processing company. Its products include fresh and prepared meats and poultry, mainly under the Maple Leaf and Schneider brands. Maple Leaf also owns 89.8% of Canada Bread....

Maple Leaf Foods has suffered several setbacks in the past three to four years. Because of unfavourable foreign-exchange rates, the company stopped exporting fresh meat products as part of a plan to focus on its more-profitable packaged-food and bakery businesses. Last year, 21 people died of listeriosis (a form of food poisoning) after eating contaminated meat. That led to lost sales and a costly recall. Moreover, Maple Leaf had to pay $25 million to settle class-action lawsuits. Meanwhile, things are going well at Canada Bread. This subsidiary accounts for 76% of Maple Leaf’s market cap. That means you can buy Maple Leaf’s core meat-processing business for about $2.60 a share. That’s cheap in light of the company’s well-known brands, high market share and improving outlook. MAPLE LEAF FOODS INC. $11 (Toronto symbol MFI; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 134.0 million; Market cap: $1.5 billion; Price-to-sales ratio: 0.3; 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. This business accounts for roughly 60% of its revenue....