Lancaster Colony (LANC, Financial) is a packaged food company which is significantly undervalued based on the GF Value chart. The GF Value is an intrinsic value estimate from GuruFocus that takes into account the stock's historical price multiples, past returns and estimates of future business performance.
I came across this stock when I was reviewing the GuruFocus consensus picks page. Six premium gurus bought shares of this company in the first quarter of 2021, and there were no guru sales of the stock during that quarter. The stock price has come down approximately 18% compared to first-quarter average prices. Below is a chart detailing the first-quarter guru buys of the stock:
| Guru | Date | Action | Impact % | Price Range | Price Change from Avrg % | Current Shares |
| Diamond Hill Capital | 2022-03-31 | Add+302.18% | +0.19% | 149.15 $159.8 170.73 | -18.31% | 442,367 |
| Lee Ainslie | 2022-03-31 | New Buy | +0.02% | 149.15 $159.8 170.73 | -18.31% | 7,798 |
| Ray Dalio | 2022-03-31 | Add+37.26% | +0.01% | 149.15 $159.8 170.73 | -18.31% | 59,014 |
| Ken Fisher | 2022-03-31 | Add+1.29% | 0% | 149.15 $159.8 170.73 | -18.31% | 243,939 |
| Jim Simons | 2022-03-31 | Add+2.62% | 0% | 149.15 $159.8 170.73 | -18.31% | 391,363 |
| Paul Tudor Jones | 2022-03-31 | Add+0.58% | 0% | 149.15 $159.8 170.73 | -18.31% | 10,561 |
Lancaster had sales of $1.46 billion in its most recent fiscal year, with 57% attributed to retail sales and the rest to food service (restaurants, cafeterias etc.). The company's three main line of products include frozen breads, refrigerated dressings, dips and other and shelf-stable dressing, sauces and croutons sold under its own brands as well as licensed brands.
Source: Company Presentation
The company is debt free and grows by acquiring brands and building them up over time. Below is a snapshot of the company's balance sheet as of December 2021.
Growth of revenue and income is modest with the company growing in the low single-digits over the last decade.
Another thing to note is the very high return on invested capital (ROIC) compared to weighted average cost of capital (WACC), which is a hallmark of a high quality business as it means the company is creating value for shareholders.
The stock has sold off recently because the company is being impacted by inflation, and this has depressed gross profits and margins. This is similar to many other food manufacturers. There is typically a lag before the company is able to pass on price increases in food to consumers.
GuruFocus' warning signs panel reveals potential issues with a declining operating margin and assets growing faster than revenue, but otherwise things look favorable.
Comparing Lancaster against peer companies on an enterprise-value-to-Ebitda ratio basis, I am reaching the conclusion that its is fairly priced. However, given that Lancaster is much better quality company than its peers given better financial strength and higher return on invested capital, one could argue that it's undervalued.
| Market Cap ($B) | Trailing 12-month EV/Ebitda | Forward EV/Ebitda | |
| Lancaster Colony Corp | 3.593 | 15.3x | 13.5x |
| B&G Foods Inc | 1.653 | 13.2x | 15.9x |
| Hain Celestial Group Inc | 2.073 | 13.5x | 13.4x |
| J & J Snack Foods Corp | 2.642 | 18x | 15.9x |
| J M Smucker Co | 13.779 | 13.2x | 16.5x |
| Hostess Brands Inc | 2.939 | 14.6x | 14.1x |
| Median of selected peers | 14x | 15x |
Lancaster is investing in plant capacity to "drive efficiency and support significant capacity expansion for dressings and sauces." It is adding 192,000 square feet to an existing facility in Horse Cave, Kentucky in order to accomplish this. The total capital expenditure for the project is estimated at $130 million, with an estimated ~$90 million to be spent in fiscal 2022 and a target completion date in the first half of fiscal 2023.
Lancaster Colony is also a dividend king. To become a Dividend King, a company must have at least 50 consecutive years of dividend increases. Because of that high standard, only an exclusive list of 37 companies make the. Lancaster, with 57 consecutive years of dividend increases, is one of the few companies on that list. Paying dividends to its shareholders is a priority for this company.
| Dividend Yield (Trailing) | 2.41% |
| (Forward) | 2.45% |
| Dividend Payout Ratio | 0.93 |
| Growth Rate (5-Year) | 0.085 |
| Yield on Cost (5-Year) | 0.0362 |
| 3-Year Share Buyback Ratio | -0.001 |
Lancaster runs a steady business with leading brands. It is not cheap, but it fits the definition of a great business at a fair price in my view. Right now, the company is undervalued due to temporary margin and earnings compression. I think odds are good that the company will resolve these issues and the valuation will come back. The pristine balance sheet gives the company great optionality to make further acqusitions and come out of the downturn stronger.
The GF Value indicates that the company is more than 30% undervalued. While this assessment may be overly optimistic in my view, I still think the stock is undervalued, though to a lesser extent.
Looking at the GF Score chart, we see that Lancaster has excellent scores for all the parameters except momentum. I believe this lack of momentum is actually an opportunity for value investors, as we like to be greedy when others are fearful.
