In the future, the packaged food industry will focus on consumer lifestyles and health care considerations. There is no doubt that the industry growth will include the introduction of products that satisfy consumers' interest in healthier eating. With this scenario, let´s take a look at one company and see the reasons why Hedge fund managers considered it a good investment.
Hillshire Brands Co. (HSH) is a leading packaged meat company. Manufactures and markets meat-centric food solutions worldwide. It operates in two segments, Retail and Foodservice. It´s portfolio include well-known brands such as Jimmy Dean, Ball Park, Hillshire Farm, State Fair, Sara Lee frozen bakery and Chef Pierre pies.
The company is focusing on a product development strategy, launching new products into the market such as flatbread sandwiches, lean hot dogs and also is planning a new packaging format. Hillshire CEO Sean Connolly said: "We clearly compete in attractive and profitable categories and as you're seeing in the marketplace, the key to success in these categories is investment, disciplined investment in brand building and innovation, margin accretive innovation". According to the first annual U.S. Food & Beverage Industry Study, one important factor that will affect sales in 2013 will be new products.
In Aug. 2013, Hillshire Brands had achieved a $40 million cost saving goal in Fiscal Year 2013, and will achieve an additional $105 million of savings over the next few years. Further to the cost reduction programs, some of them will be related to efforts to improve productivity.
In terms of valuation, the stock sells at a trailing P/E of 19.3x, trading at a premium compared to an average of 18.9x for the industry. Analysts’ expectations imply a forward P/E of 17.72. To use another metric, its price-to-book ratio of 8.5x indicates a premium versus the industry average of 1.47x and the price-to-sales ratio of 1.1x is above the industry average of 0.87x.
Earnings Per Share (EPS) declined by 42.5% in the most recent quarter compared to the same quarter a year ago. Also, it has demonstrated a volatile trend in EPS growth over the past ten years as shown in the next graph. We include the stock price because EPS often lead the stock price movement.
Finally, I always like to see of one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has increased when compared to the same quarter one year ago. I have to emphasize this because is a signal of major strength within the company. Hillshire ROE of 56.9% is above the industry mean of 38.6% and also higher than Tyson Foods, Inc. (NYSE:TSN); Mondelez International, Inc. (NASDAQ:MDLZ); Hormel Foods Corporation (NYSE:HRL); ConAgra Foods, Inc. (NYSE:CAG); General Mills, Inc. (NYSE:GIS) and Kellogg Company (NYSE:K).
|Ticker||Name||Mkt Cap||EPS - 1 Yr Gr:Y||P/E||ROE||Div. Yield|
|HSH||HILLSHIRE BRANDS CO||4,130.5||19.3||56.9||1.6|
|TSN||TYSON FOODS INC-CL A||10,881.8||40.8||14.3||12.7||1.0|
|MDLZ||MONDELEZ INTERNATIONAL INC-A||59,593.7||-10.3||22.3||8.0||1.6|
|HRL||HORMEL FOODS CORP||11,884.8||4.7||22.6||17.2||1.5|
|CAG||CONAGRA FOODS INC||13,841.9||66.4||16.1||13.5||3.0|
|GIS||GENERAL MILLS INC||32,049.3||18.2||18.4||23.1||2.7|
It is very important to understand this metric before investing in a high-growing company.
This is time to establish the company's strategic foundation, it is not crucial the current performance. Profits in the future will reflect the benefit of the company's cost reduction programs as well as all the effort made in innovative products.
Compared to other companies in the industry and the overall market, the company's ROE significantly exceeds that of both the industry average and the S&P 500. Finally, analysts expect an improvement in earnings, leaving behind the poor performance.
Hedge fund gurus like George Soros, Joel Greenblatt, Steven Cohen, Jim Simons, Mario Gabelli and John Keeley added this stock to their portfolios. I would advise fundamental investors to consider adding Hillshire to their portfolios as it seems to be an attractive option.
Disclosure: Victor Selva holds no position in any stocks mentioned