More Than Just Canned Peaches

09/03/2009 10:54 am EST

Focus: STOCKS

Charles Carlson

Editor, DRIP Investor

Charles Carlson, editor of the DRIP Investor, says Del Monte is best known for its canned foods, but its pet-food business—and strong earnings—are the real appeal. 

I'm often drawn to companies that either fly under the radar or are misunderstood by investors.

Take Del Monte Foods (NYSE: DLM). Most people recognize the Del Monte name and the company’s brands in the fruit and vegetable business. But did you know that Del Monte is also home to some of the most popular pet-food brands in the marketplace?

Profits have been solid in recent quarters, and growth should continue in 2010. An improving financial position and a rising dividend round out the appeal. The stock has performed well this year, and further price gains are expected. The stock represents one of the more attractive low-priced plays in the DRIP world and should be considered by more aggressive investors.

In the consumer market, Del Monte carries the Del Monte, S&W, Contadina, and College Innbrands. Del Monte is either number one or number two in food/mass market share in fruit, vegetables, tomato, and broth. The company has refined its business portfolio with the divestiture of the volatile StarKist seafood line.

Pet-food brands include Meow Mix, Kibbles 'n Bits, 9Lives, Milk-Bone, Pup-Peroni, Snausages,and Pounce. With the [recent] acquisitions of Meow Mix and Milk-Bone, Del Monte now has the third largest market share in pet food, the top market share in pet snacks, the second largest market share in dry cat food, and the number-two market share in wet cat food.

This assortment of leading brand names has provided solid earnings growth of late. Del Monte has easily beaten analysts’ earnings estimates in the last three quarters. Per-share profits should be up at least 8% in fiscal 2010 ending in April. Per-share profits should rise at least 10% in fiscal 2011.

While the company does carry a fairly high long-term debt load at 49% of total capital, Del Monte has reduced its long-term debt load [by] more than $400 million since 2007.

Reflecting its improved earnings outlook, the firm recently boosted its dividend 25%. The new quarterly rate is [five cents] per share, giving these shares an indicated dividend yield [of about] 2%. Supporting the dividend should be steady earnings growth, as well as further improvement in the firm’s financial position.

Del Monte is trading just off its 52-week high of $10.78 per share. These shares are not without risks. The debt load is a concern, especially if the market returns to the credit-crunch days of 2008. And consumer demand will likely remain stressed. Still, the stock traded for nearly $13 per share in 2007, and I expect a retest of that level over the next 12 to18 months. Enhancing appeal is the company’s direct-purchase plan, which makes it easy for any investor to buy shares directly, the first share and every share. Minimum initial investment is $200.

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