Del Monte Foods (DLM) has just had an excellent fiscal fourth quarter spurred by rising prices and cost cutting. Wall Street analysts were expecting to see earnings of 26 cents on revenue of $957 million, but actual results easily exceeded those results with 35 cents of profit and revenue was $1.06 billion. The can food and pet food producer was able to raise prices in the face of rising input prices. The consumer products division increased revenues 20% and aggressive cost cutting boosted earnings a gaudy 55%. The pet food division was also an especially bright spot as revenue climbed 22% on that division and earnings were 7.5% higher. The stock is up about 8% in early afternoon trading on Thursday, benefiting from an upbeat earnings outlook for the year ahead.
“Watch the Del Monte, this morning Del Monte trading higher after beating by nine cents on the bottom line on its quarterly earnings and boosting the outlook saying that they’ve got power.” CNBC’s Squawk on the Street 6/11/2009
The company has benefited from people eating in for more meals, and luckily the increased prices for Del Monte goods did not hurt market share versus private label or store branded can goods. In the conference call, Del Monte management alluded to the fact that the company should be able to drive revenue higher by continuing to focus on its core brands, and they added that the company was planning to amp up its marketing budget in the year ahead by up to 40%. Clearly, they are trying to capitalize on the changes in consumers behavior recently, as we are seeing savings rates rise at 15 year highs and thrifty behavior from grocery shoppers.
At Ockham, we had placed an Undervalued valuation on Del Monte as of the close of trading last week. The company has been able to raise revenue each of the last 3 years, and gross margins have improved dramatically in the last year from 26.9% to 31%. Thus far the company has straddled the line between being a “trade down brand” but still increasing prices. Furthermore, the company does have a large amount of debt coming due in the next year and a half, and reworking some of those contracts would certainly take some pressure off of the company.
For now though, our ratings methodology still suggests that Del Monte is slightly undervalued even after today’s run up. Since the current rally began in early March, Del Monte has under performed the S&P 500 by about 22%, suggesting that there may be further price appreciation yet to be achieved. The underlying fundamentals are improving in this economy and could support a price of somewhere between $9 and $11 for this company.