Is the bacon you eat bringing home the bacon?
Now more than ever, there’s an increased public focus on how food makes it to the kitchen table. The trend may have sprung from health and ethics concerns, but it can also serve up a valuable opportunity for equity portfolios.
If a food-processing company makes its processes more efficient, it could mean its dinners pay out dividends for investors. Much like healthy eaters, then, healthy investors should look for products that are getting leaner.
That’s the story with Maple Leaf Foods Inc., the Toronto-based consumer packaged food maker. The company is faced with a lot of debt – as Globe Streetwise columnist Boyd Erman recently said, it “owes a lot of money to a lot of people” – and has been making significant changes to its operations to alter that.
The company is mulling over the potential sale of Canada Bread Co. Ltd., its 90-per-cent-owned bakery division, and has just passed the midpoint of a five-year, $575-million restructuring of its meats division. It’s been closing older plants, including the one at the centre of a listeria outbreak in 2008, and opening newer, more efficient ones, and considering options to sell off even more of the meat division. (At the end of October, the company closed a deal to sell rendering business Rothsay to Texas-based Darling International Inc. for $645-million.)
So for investors who like their meat companies lean, an investment in Maple Leaf Foods might be worth considering. Even since the company announced a 40-per-cent decline in third-quarter profit in October, the company’s stock has risen 7 per cent.
Scott Clayton, an analyst with investor newsletter service TSINetwork.ca, says the processor exhibits one of the things the firm loves in a stock: hidden value. “For a long time, if you bought the stock and factored in the value of the Canada Bread holdings, you were basically getting the meat division for free,” Mr. Clayton says. With strong brand names such as Maple Leaf Prime and Schneiders Foods behind it, he says, that division’s strength helped the stock.
This quarter’s loss largely resulted from restructuring and other costs in their meat division. Over time, “the money they’re spending to upgrade and build new plants will pay off in the future,” Mr. Clayton says.
Mark Petrie, an analyst with CIBC World Markets, said in a research note that while the meat division “continues to work its way through a number of headwinds,” the conditions driving these issues “should improve over time, but patience is required to see a turnaround.” He kept his price target for the stock at $19 over the next 12 to 18 months; it closed at $16.33 (Cdn.) on Wednesday.
“Senior management expects the company to experience the bulk of the benefits realized from the restructuring efforts in the back-half of 2014 and into 2015,” writes Scotia Capital Inc. analyst Christine Healy in a research note. She raised her one-year price target for Maple Leaf Foods shares to $16.
Being eyed as a potential takeover target also helps Maple Leaf Foods’ value, Mr. Clayton says. In the meantime, the company is fighting its way through its mountain of debt. He says that while it holds about $1.3-billion in debt, if sales of its various divisions pan out, the $645-million Rothsay deal and the potential sale of Canada Bread could help erase much of what Maple Leaf Foods owes.
Despite being majority-owned by Maple Leaf Foods, Canada Bread is its own publicly traded company; its shares have risen nearly 50 per cent in the past year. That’s due to its possible sale, Mr. Clayton says, and, in combination with the company’s current illiquidity, makes him wary to suggest buying the stock. “It’s worth holding, but there are better stocks for new buying,” he says. Other experts believe the potential sale presents a win-win situation for shareholders.
Investors should look for companies that are “honing what the business should be about,” Mr. Clayton says. That’s why Maple Leaf Foods is looking good: restructuring is giving it focus. “This is an example of the kind of stock we would look for,” he adds.
Four of the nine analysts covering the company tracked by Bloomberg rate the stock as a buy or equivalent, with another four rating it as a hold or equivalent.
Other food-processing stocks have found similar luck after restructuring. General Mills Inc. has risen more than 30 per cent since it announced that it was implementing cost-saving measures in May of 2012. Campbell Soup Co. announced a similar program in June of 2011; the stock price took an immediate dip, but it’s risen 19 per cent since the announcement.
None of this is to say that restructuring is a positive thing for everyone. Maple Leaf shed at least 1,500 jobs as part of its overhaul. It’s a familiar problem: Just look at Leamington, Ont., where 700 people are slated to lose their jobs when the local Heinz plant shuts its doors next June. Heinz’s owner, Warren Buffett’s Berkshire Hathaway, bought the ketchup king this year, bringing cost-cutting measures along with it. (The juggernaut holding company’s price has effectively been flat since the sale, for what it’s worth.)
Kellogg Co. is one example of a company where restructuring hasn’t worked out for anyone. The cereal company, which is trying to streamline through a four-year program called “Project K,” just announced it’s closing its London, Ont. plant next year, shedding 500 jobs in the process. And its stock price? That fell slightly lower after the announcement.
Analysts aren’t too optimistic on the stock: Alexia Howard of Sanford C. Bernstein & Co., for instance, says in a research note that while Kellogg’s share price has a “compelling” valuation, it’s suffering through the U.S. cereal industry’s ongoing structural decline amid the scourge of Greek yogurt and oatmeal bars. While there may be an entry point to buy the stock in the first half of next year, she says, that won’t be clear for the next five or six months.
This drives home an important point: Cost-cutting or measures to boost productivity can be great, but they’re far from the only things to look for when buying stocks. Other circumstances could be holding back share values. As always, make sure to talk to an investment adviser about what fits best with your personal investment plan. Professional advice is always a smart idea, no matter how you slice it.