Maple Leaf Investors Undeterred by Bakery Blip

Investors are betting Maple Leaf Foods Inc. (MFI) can rebound from a slump in bakery sales by cutting costs as the food company trades at half the price-earnings value of its peers.

Canada’s second-largest food processor has outperformed the Standard & Poor’s/TSX index this year by 8.6 percentage points even after the stock fell last week due to a drop in bakery sales. Maple Leaf’s price-to-earnings ratio is at an 8.2 percent discount to the S&P/TSX after narrowing from 30 percent Feb. 24, showing increased investor interest, according to data compiled by Bloomberg.

The Toronto-based meat processor and baker may double its price in three years as it consolidates into new plants and updates systems to cut expenses, according to Michael Van Aelst, an analyst at TD Newcrest in Montreal.

“The road will likely not be without some temporary hazards,” Aelst wrote in a note to clients May 3. “We see very good value in a company that, in our view, has significant upside over the next three years.”

Chief Executive Officer Michael McCain, who owns 33 percent of Maple Leaf, worked with board member Greg Boland, CEO of West Face Capital Inc., a hedge fund that owns the next largest stake with 11 percent, to revise a company restructuring project last year.

Half as Expensive

Maple Leaf is about half as expensive as an average of its North American peers when comparing price to trailing 12-month sales, and about five times less than the S&P/TSX, according to data compiled by Bloomberg.

Cutting duplicate overhead costs in the bakery division after closing two plants earlier this year and other efficiency gains should save C$25 million ($25 million) in 2012, Kenneth Zaslow, an analyst at BMO Capital Markets in New York, said in a note May 3. The meat division should beat its 8.5 percent margin target this year through price increases, product innovations and the falling cost of pork and supplies, he said. He forecast a share price of C$14, compared with a May 4 closing price of C$11.77.

Maple Leaf’s stock “remains relatively inexpensive,” Zaslow said. “It’s not unusual, in fact it is quite typical, that companies undergoing a large restructuring program face temporary setbacks.”

First-quarter earnings per share dropped to 11 cents, below the 17 cent average estimate of five analysts. Revenue fell to C$1.16 billion compared with C$1.15 billion in the same period last year.

Bread Promotion

An advertising campaign will promote bread as a healthy food choice and bakery margins will improve in the second half from lower wheat costs to help maintain annual double-digit earnings per share growth, McCain said on a conference call May 2.

“We’re committed to double-digit earnings per share growth every year and we believe that we’ll deliver that this year as well,” he said.

The fresh bakery market has slumped 3 percent in Canada over the past 12 weeks, according to Nielsen Co., with Maple Leaf “down a little bit more than that” McCain said. The market fell 5 percent in the U.S. and the U.K., where one bright spot is positive response to the company’s new New York bagel, he said.

“There’s rather stark short-term declines in bread consumption and the industry needs to respond to that in a pretty aggressive way,” he said.

30 Companies

Maple Leaf has bounced back before. It rebounded from a 12- year low of C$7 on Oct. 14, 2008, after 23 people died and 34 others were poisoned by contamination of listeria monocytogenes, a type of bacteria, in meat processed at a Toronto plant. Now it’s refocusing on larger scale plants and standardizing recipes after acquiring more than 30 companies in the last 15 years, such as J.M. Schneider Foods, Shopsy’s Deli, Burns Meat, Gainers and Larson, said Linda Kuhn, a spokeswoman for the company, in a telephone interview.

McCain, part of the family that owns Florenceville, New Brunswick-based McCain Foods Ltd., the world’s largest producer of French fries, first proposed a C$1.3 billion spending plan for Maple Leaf in 2010 before Boland bought a 10 percent stake held by the Ontario Teachers’ Pension Plan. The plan was then whittled to spending C$750 million by 2013 and called for closing eight plants and cutting 1,550 jobs by 2014.

Competition

“Greg was part of that process just to ensure that they were confident that it would deliver the return on investment,” Kuhn said. “He has certainly been a very strong addition to the board and with very, very constructive suggestions.”

The company, valued at C$1.64 billion with C$4.9 billion in revenue last year, is also contending with a Canadian dollar valued at $1.01, which can hurt exports and increase competition with American imports in Canada, such as ConAgra Foods Inc. (CAG) and Sara Lee Corp. (SLE)

Maple Leaf increased to a 52-week high of C$13 April 27 after the company shut two prepared meats plants and a distribution center as part of the plan to close a productivity gap with U.S. peers and maintain its market share in Canada, according to the company.

Production from the two closed Toronto-area bakeries flowed to a new Hamilton, Ontario, plant with improved automation. A C$395 million prepared meats plant is being built nearby this year, while a company-wide computer systems overhaul is to be completed by 2013. Two distribution centers will be closed, leaving one each for east and west Canada, Kuhn said.

To contact the reporter on this story: Colin McClelland in Toronto at cmcclelland1@bloomberg.net

To contact the editor responsible for this story: David Scanlan at dscanlan@bloomberg.net

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