Food Maker Quietly Making Ten-Year Highs
03/11/2010 12:01 am EST
A relatively quiet consumer products company that has been in business since 1916 has made new ten-year highs over the past week—DelMonte Foods (DLM). This week, DLM reached its highest level since 1999.
DLM is primarily in the food business, with its major divisions being edibles for humans and pets. It looks like the pet division is driving the recent growth, with such strong brand names such as Meow Mix, Kibbles ‘n Bits, 9Lives, and Milk Bone. Its human food division includes brand names such as DelMonte and StarKist.
The earnings report last week is what has given the shares their most recent upward spike. Quarterly revenues increased 7.5% and the company raised its yearly earnings target. A quick look at the fundamentals shows reasonable current and forward P/E ratios in the 11 area, and decent profit margins for its sector in the 10% area. Debt looks a little higher than I would like, and the dividend is below 1.5%.
It's likely that the recession has caused many consumers to level down from the "ultra-premium" pet foods, yet they still want to give little Fido or Smokey a quality of food better than the bottom shelf. This would seem to be a sweet spot for the Meow Mixes and Kibbles of the world.
Anyway, as usual, the charts tell the story. First, look at this ten-year breakout:
In general, I utilize these long-term monthly charts to ascertain the big picture—they're not quite as good for short-term timing. But what we see here is a clear upside breakout, even above the trend line I've drawn in, which pointed to 12.50 as being a key area. On this chart, the previous highs in the 16/17 area look very reachable and could be taken out en route to 20. But there certainly could be a pullback in the meantime, and it may take time for the final surge to develop.
Let's also take a look at a weekly chart that covers the massive moves in both directions from 2007 to the present:
You can see we've had a giant "V"-shaped formation that bottomed in late 2008 during the market panic. We recently surpassed this range, also in the 12.50 area. What's impressive in this rally has been the big volume on the upside. Additionally, we've just broken out of a consolidation range in the 10.50 to 12.50 area, which held from September 2009 to March 2010. This is certainly a bullish breakout. But keep in mind that we've had a massive move from the 2008 low below 6 to the current prices.
Bottom line, DLM looks like a very good long-term buy on a pullback to the 13/12.50 area.
By Moby Waller of BigTrends.com