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Del Monte's Pet Friendly Quarter
Consumer products and pet food company Del Monte Foods' (NYSE:DLM) fiscal 2011 second quarter results were saved by a solid showing from the pet products segments. Overall, second quarter sales were down nearly 2% largely in part to a 5% drop in consumer product sales. Pet product sales were up 3%. As a result, EPS from continuing operations were 41 cents in the current quarter, up over 30% from the year ago EPS of 31 cents.
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A Pet Friendly Society
It's no surprise that Americans treat their pets like children. They want the very best for them. And if you're single with a pet, then you are likely to have more disposable resources to bestow upon your furry friend. Looking closer at Del Monte's pet products segments shows a solid overall performance. Pet products net sales were $433.2 million, an increase of 2.6% over net sales of $422.1 million in the prior year period. The increase in net sales was primarily due to strong unit volume growth and new product volume growth. Del Monte owns popular brands such as 9Lives and Meow Mix cat food. Pet products' operating income increased from $84.8 million to $93 million (9.3%) in second quarter fiscal 2010.
The consumer segment under performance comes as no surprise considering the state of the economy. Due to lower unit volumes, consumer product net sales were $507.7 million, a decrease of 5.4% from net sales of $536.8 million in the prior year period. Yet thanks to lower costs, operating income showed a slight increase over the prior year quarter. (For more, see Zooming In On Operating Income.)
A Typical Buyout Target
For the full 2001 fiscal year, Del Monte is projecting free cash flow of nearly $290 million, an increase from prior guidance of $265 million. With a market cap of $3.6 billion, that represents 12 times free cash flow. Earlier this month private equity firm KKR (NYSE:KKR) announced it was buying Del Monte for $4 billion. KKR is obviously attracted by the cash flow generation. And once Del Monte goes private the additional $40 million that DLM pays in dividends each year will go to KKR in the form of additional savings - i.e. increased cash flow.
Del Monte's pet segment should continue to do well over the years. Most consumers won't skimp out on the necessities of Fido even during the worst times. That's certainly seems to be the case when you look at companies like PetSmart (Nasdaq:PETM), a specialty retailer of all things pets. PetSmart shares trade at a 52 week high. Even still, aggressive investors may find more to like at PetSmart. Shares trade for under 17 times forward earnings and yield 1.3%. Another pet angel is PetMed Express (Nasdaq:PETS), an online pet pharmacy. Those shares yield nearly 3% and the balance sheet is cash rich.
Bottom Line
With the pending buyout of Del Monte by KKR, earnings won't have any effect on the share price. But the resilience of the pet products segment may provide insight for other investment ideas. (For more, see Keep Your Pet's Trust.)
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IN PICTURES: 9 Simple Investing Ratios You Need To Know
A Pet Friendly Society
It's no surprise that Americans treat their pets like children. They want the very best for them. And if you're single with a pet, then you are likely to have more disposable resources to bestow upon your furry friend. Looking closer at Del Monte's pet products segments shows a solid overall performance. Pet products net sales were $433.2 million, an increase of 2.6% over net sales of $422.1 million in the prior year period. The increase in net sales was primarily due to strong unit volume growth and new product volume growth. Del Monte owns popular brands such as 9Lives and Meow Mix cat food. Pet products' operating income increased from $84.8 million to $93 million (9.3%) in second quarter fiscal 2010.
The consumer segment under performance comes as no surprise considering the state of the economy. Due to lower unit volumes, consumer product net sales were $507.7 million, a decrease of 5.4% from net sales of $536.8 million in the prior year period. Yet thanks to lower costs, operating income showed a slight increase over the prior year quarter. (For more, see Zooming In On Operating Income.)
For the full 2001 fiscal year, Del Monte is projecting free cash flow of nearly $290 million, an increase from prior guidance of $265 million. With a market cap of $3.6 billion, that represents 12 times free cash flow. Earlier this month private equity firm KKR (NYSE:KKR) announced it was buying Del Monte for $4 billion. KKR is obviously attracted by the cash flow generation. And once Del Monte goes private the additional $40 million that DLM pays in dividends each year will go to KKR in the form of additional savings - i.e. increased cash flow.
Del Monte's pet segment should continue to do well over the years. Most consumers won't skimp out on the necessities of Fido even during the worst times. That's certainly seems to be the case when you look at companies like PetSmart (Nasdaq:PETM), a specialty retailer of all things pets. PetSmart shares trade at a 52 week high. Even still, aggressive investors may find more to like at PetSmart. Shares trade for under 17 times forward earnings and yield 1.3%. Another pet angel is PetMed Express (Nasdaq:PETS), an online pet pharmacy. Those shares yield nearly 3% and the balance sheet is cash rich.
Bottom Line
With the pending buyout of Del Monte by KKR, earnings won't have any effect on the share price. But the resilience of the pet products segment may provide insight for other investment ideas. (For more, see Keep Your Pet's Trust.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Sham Gad
Sham Gad is the Managing Partner of Gad Partners Fund's, value inspired investment partnerships modeled after the Buffett Partnerships of the 1950's. Previously, Gad ran the Gad Investment Group and delivered annualized returns of 22% from 2002 to 2005. Gad is also the author of "The Business of Value Investing" which will be out in the fall of 2009. Gad earned his MBA at the University of Georgia in May of 2007. Gad runs a value investing blog. He can also be reached by visiting the Gad Partners Funds site. When not writing or analyzing businesses, Gad enjoys hanging out with his wife Maggie, reading, golf, and yoga
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