Friday, August 29, 2008

FUNDAMENTAL FEATURE - Del Monte Foods (DLM)

Rotten Earnings: Del Monte Foods posts Q1 Loss

On Thursday August 28, before the market open, Del Monte Foods Co. (DLM) reported a Q1 loss of $0.05 per share ($0.04 from continuing operations) or $10.1 million on $726.2 million in revenue vs. earnings of $0.02 or $3.5 million on $626.8 million in revenue a year ago. Revenue increased by 15.9% due to price hikes, volume growth, and new products. Discontinued operations added a $0.01 per share loss to the results. Analysts were expecting a loss of $0.03 per share, missing expectations by $0.01 per share. The stock gapped up and opened at $8.98, sold off throughout the day, and closed at $8.60 on 1.83 million shares, up $0.01 from Wednesday’s close of $8.59.

DLM’s Consumer Products division increased sales 20.6% to $383.5 million vs. $317.9 million a year ago. Price hikes and volume growth contributed to the increase; however, the division’s operating income was flat at $9.8 million due to higher costs. The company’s general and administrative (G&A) expenses increased due to “centralization” of marketing and other functions. Headquartered in San Francisco, CA, DLM built a new plant in Pittsburg in 2006, but moved over 100 employees to its headquarters this year. Whether it was necessary or not, if DLM did not move the employees, G&A expenses would not be at $146.1 million, up from $132.8 million a year ago.

DLM’s Pet Products division increased sales 10.9% to $342.7 million vs. $308.9 million a year ago. Again, this was due to price hikes and volume growth. Operating income decreased a whopping 64.9% to $15.4 million from $43.9 million a year ago. After an increase in ingredient costs, marketing and promotion costs reflected the majority of expenses. Instead of showing cute dog barking on their website, they should pay more attention to reducing their expenses if they care to stay afloat in this secular commodities bull market.

In June, DLM announced that they have agreed to sell their seafood business (including the StarKist brand) in Terminal Island, CA and manufacturing businesses in American Samoa and Ecuador to Dongwon, a South Korean conglomerate of seafood, warehousing, distribution, and other businesses. The sale should be completed by the end of Q2.

Due to inflation, the cost of goods sold increased 23.8%, and gains in the company’s top-line were unable to offset the loss. In addition, the DLM’s cash and cash equivalents dropped to $8.6 million, a 66% decrease compared to a year ago. A lack of international exposure is being paid for by the domestic economic slowdown.

Hormel Foods (HRL), Smithfield Foods (SFD), and Sanderson Farms SAFM) demonstrate what kind of impact inflation had on their bottom lines. On August 21, HRL reported earnings of $0.38 per share or $51.9 million vs. $0.41 per share or $57.4 million a year ago, down 9.8%. On August 26, SFD reported a loss of $0.09 per share or $12.6 million vs. earnings of $0.41 per share a year ago. And on the same day, SAFM reported a loss of $0.18 per share or $3.6 million vs. earnings of $1.51 per share or $30.7 million. It’s clear that everyone in the industry is suffering pretty badly, and the recent earnings (losses) prove it. With that said, the industry outlook is negative.

For the full fiscal 2009 year, DLM expects earnings of $0.58 - $0.62 per share. Analysts were looking for $0.57 - $0.58 per share, barely at the very low end of the spectrum. Management expects sales growth of 6-8% for the fiscal year to $3.37 - $3.43 billion, while analysts expected revenue of $3.67 billion. During the fiscal 2008 year, DLM bought back $50 million work of shares (5.37 million shares) under a 3-year $200 million share repurchase plan (Better save that up money first!).

Currently, 9 firms publish recommendations on DLM with 6 “hold” ratings and 3 “sell” ratings. The last rating was on July 16 when Matrix Research downgraded DLM from “Strong Buy” to “Buy”. Since there are 9 analysts, no recent ratings/price target changes, and earnings just came out, expect a few ratings and price target changes to come out soon.

Technically, DLM is down from its recent high of $12.94 on July 13, 2007 and has been drifting down ever since. In May and June, DLM suffered from large one-day drops, sending the stock in a downward spiral. So far, DLM recovered, but on Thursday, it formed a bearish gap up, which is one of my favorite patterns to short. The likelihood of a decline from this point is extremely high. Anyone that wants to short can hold a position till it reaches the 50-day MA at $8.20. Going long is ill-advised.




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