All-America Research Team Member And Sanford C. Bernstein Analyst Upgrades Sara Lee (SLE) And Dean Foods (DF); Discover All The Top Picks In An Exclusive Interview
March 22, 2012 - The Wall Street Transcript has just published Restaurants, Food and Drinks Report offering a timely review of the sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
Alexia Howard is the Analyst covering U.S. foods at Sanford C. Bernstein & Co., LLC. She was named to Institutional Investor's All-America Research Team in 2008, 2009, 2010 and 2011. Before joining Bernstein, Ms. Howard was a Consultant with Marakon Associates, working with leaders of consumer products companies and retailers to develop strategies, improve organizational capabilities and allocate resources to enhance shareholder value. Ms. Howard earned her B.A. with honors in economics at the University of Cambridge, England, in 1991 and her MBA from INSEAD, France, in 1998.
TWST: To get us started, please give us a snapshot of your coverage universe.
Ms. Howard: I cover all of the large packaged food names here in the U.S., so we're talking about Kraft (KFT), Kellogg (K), General Mills (GIS), Campbell Soup (CPB), Heinz (HNZ), McCormick (MKC), Smucker's (SJM), Hershey (HSY), Sara Lee (SLE), ConAgra (CAG), Ralcorp (RAH) and Dean Foods (DF).
TWST: You upgraded two other companies relatively recently, Dean Foods last fall and Sara Lee in February. Please tell us about the reasons behind those upgrades. What are you expecting from these companies?
Ms. Howard: On the Dean Foods front, it was through talking to people in the industry. The retail environment was so tough in 2009 and 2010 for milk manufacturers - retailers were pushing private label milk hard and asking for more promotional spending dollars from the manufacturers - yet this was behind us by the middle of 2010. And so by the fall of 2011, all of that difficulty was behind us. Also at the same time, milk prices were beginning to fall, which should also remove a lot of the pressure from Dean Foods. Moreover, even with the very difficult milk prices that we saw in 2011, the company was still pulling off fairly respectable operating profit and EPS results.
Finally, it no longer looked as though they were going to trip their debt covenants, which had been the fear when the debt levels were extremely high. At the time, the stock was trading relatively very attractively and it's still a relatively cheap stock. It's since had a great run, but we have seen some nice performance come through in the last couple of quarters, and it looks as though the guidance for 2012 means that this can continue over time. I took my target price up from $13 to $16 when they reported, because as milk prices come down, a lot of the pressure that they've had should fall away and allow the productivity savings that they have been focused on fall more directly to the bottom line.
This is a company that's made so many acquisitions over the years, the room for cost improvement nationally is sizable - $100 million a year is material in terms of contribution to earnings per share. The other thing that struck me about the results was that free cash flow improved despite a relatively high level of capital expenditure. That's really important for this company because that's how they are going to get their leverage down. They exceeded their net-debt-to-EBITDA goal for this quarter.
TWST: And how about Sara Lee?
Ms. Howard: I upgraded Sara Lee fairly recently. This is another event-driven company that's planning to split itself this summer, by the end of June or so. And it's now only two businesses, so this is very different from the old Sara Lee that had bread and all sorts of other stuff over the years. They are breaking apart the international coffee and tea business from the North American meats business. The international coffee and tea business is a very strong portfolio. It has more than 30% of sales in emerging markets. It has the potential to get back up to 17%, 18% operating margins, which was the typical level for coffee before coffee bean prices surged about 18 months ago.
Consumers are very loyal to particular brands of coffee, so price elasticity tends to be fairly low. The business has innovated well in Europe over the last several years, and they are now extending the business through bolt-on acquisitions, into places like Brazil and Eastern Europe. At the moment, investors seem to value Sara Lee thinking it's the Sara Lee of old, but the coffee and tea business is a strong company that's always been the crown jewels of the organization and deserves to trade at a premium to the rest of its packaged food peers in North America.
When you look at the North American meats business, this isn't going to be quite as sexy in terms of its growth profile because it is largely U.S. based. But again, it's done a good job on innovation over the last several years - and more importantly, I think there is a good chance that that business may become a potential takeout candidate. If I think about the more upstream meats companies here in the U.S. - Hormel (HRL), Tyson (TSN), Smithfield (SFD), even JBS (JBSS3.SA) out of Brazil - I think a lot of them might like a portfolio that's more downstream in the more value-added, higher-margin, more stable part of the meat value chain, although, of course, no one has commented publicly on this.
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