Restructuring Provides a Bargain

05/03/2013 7:45 am EST

Focus: STOCKS

Patrick McKeough

Editor, Successful Investor

A turnaround is in the works at this Canadian food company, and it creates a "meaty" buying opportunity, says Pat McKeough of TSI Network.

Maple Leaf Foods (Toronto: MFI) is Canada’s largest food processing company. It mainly sells its products, which include fresh and prepared meats and poultry, under the Maple Leaf and Schneider brands. Through 90%-owned Canada Bread, the company also makes fresh and frozen bread, pastries, and pasta.

Maple Leaf is starting to see the benefits of a major restructuring plan, which includes building new plants and eliminating unprofitable products. It’s also installing a new computer system that will give its managers more timely information.

In 2012, Maple Leaf’s earnings rose 40.5% to $122.7 million, or 81 cents a share. In 2011, it earned $87.3 million, or 58 cents a share. If you disregard restructuring costs, earnings per share rose at a more modest rate of 5%, to $1.06 from $1.01.

The company is paying higher prices for ingredients such as wheat and corn. In response, it has raised its selling prices. Even so, sales for the year fell 0.6%, to $4.86 billion from $4.89 billion. That’s mainly because Maple Leaf sold its fresh sandwich business and closed a bakery in the UK. Unfavorable currency exchange rates also hurt its sales growth.

Maple Leaf has borrowed most of the cash it needs to complete its restructuring. As a result, its long-term debt rose 28.1% in 2012, to $1.2 billion. That’s still a manageable 60% of its market cap. Ongoing savings from the restructuring will also give Maple Leaf more cash for debt repayments.

Thanks to the company’s improving outlook, the stock has gained 13% in the past year. It now trades at 12.7 times Maple Leaf’s projected 2013 earnings of $1.10 a share. The 16-cent dividend yields 1.1%.

At current prices, Maple Leaf’s stake in Canada Bread is worth roughly $8.40 per Maple Leaf share. That means you get Maple Leaf’s meat-processing operations, which account for nearly two-thirds of its sales, for just $5.60 a share.

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