A Way To Bring Home The Bacon?

Thorn Apple Valley has nothing to do with apples, but to some smart-money pros, it's a stock to sink your teeth into. Thorn Apple is in the pork-processing business and also makes hot dogs and bacon. Its stock has fallen from 42 a share in January to 28, although earnings have turned around significantly since 1991.

"Based on its current price-earnings ratio of 5, and other measures such as cash flow and book value, the stock is way undervalued," says Ron Strauss, veteran food analyst at William Blair in Chicago. If the company completes the earnings turnaround now under way--as Strauss believes it will--he sees the stock climbing back to its old high of 44 in a year or so. The market, says Strauss, has been slow to appreciate what's happening at Thorn Apple.

Here's part of what has impressed the analyst: In fiscal 1990, Thorn Apple lost $3.8 million, or $1.02 a share, as the economy weakened and hog prices rose. But in 1991, the company focused on high-margin meat products and instituted cost cutting and streamlined production and marketing. The result: earnings jumped to a record $18.7 million, or $4.23 a share. Strauss expects another record this year, with earnings coming in at $5.55 a share, and he thinks the company will earn $6 in 1993.

One of the company's closest competitors, Smithfield Foods, trades at a p-e of 10. If Apple Thorn were awarded that kind of a p-e, the stock would soar--to the 50s. Strauss thinks Thorn Apple deserves such a p-e.

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