With a multi-year restructuring phase finally starting to show positive results, packaged foods maker Sara Lee Corp. (SLE) has announced a great expansion to their existing share repurchase program. Following the sales of some of its slower growth units, Sara Lee will use the proceeds to buy back $2.5-$3 billion worth of shares over the next three years. Furthermore, the company said it plans to front load these efforts and aims to repurchase $1-$1.3 billion in this calendar year. With that said, management was very clear that they will not buy back more than $500 million until they receive the capital from the sale of their Body Care division to Unilever N.V. (UN). That deal was valued at around $1.87 billion, and Sara Lee also sold its air freshener business to The Procter & Gamble (PG) for $475 million.
Sara Lee’s market cap coming into the day was just a little over $9 billion, so this buy back could represent as much as a third of the company. These efforts would not be possible without the aforementioned asset sales, but also operating results have come in stronger than expected in each of the last four quarters. Most recently, Sara Lee reported fiscal second quarter earnings of $.40 per share, easily topping analysts’ estimates of $.23 thanks in large part to cost cutting. It appears that the restructuring efforts that have been underway for years are finally proving their worth, as the stock has under-performed greatly in that time. For example, Sara Lee is down 43% over the last five years, while the S&P 500 has only fallen 9.5%.
Some investors might argue that Sara Lee would be better served to invest their capital in something that will facilitate growth, but at this time that is not their plan. Instead, they would prefer to support their stock price which we believe is relatively cheap. For example, when we compare Sara Lee against itself historically, it is well below its normal valuation. Take a look at price-to-cash earnings for instance, SLE currently trades for about 7x cash earning, while the historically normal price-to-cash earnings has ranged between 9x and 15.9x. Similarly, price-to-sales has historically been .63x to .97x, and the current metric is on the lower end of the range at .69x. We actually downgraded SLE two weeks ago to Fairly Valued from Undervalued, but clearly the per share valuation metrics will improve greatly as a result of the buy backs.
Today’s announcement should benefit Sara Lee investors, and taking shares out of the market will undoubtedly improve their per share metrics. In addition to the enhanced buy backs, management reiterated their goal of increasing the dividend over the coming years. We believe there is reasonably good value here, especially for long term investors perspective. The turnaround efforts of CEO Brenda Barnes are showing the first signs of success as they concentrate on their food and beverage divisions, and today’s news shows that they are using their new found excess capital in a shareholder-friendly way.