Mario Gabelli, the Chairman and CEO of GAMCO Investors, is famous for his long-term investment track record. Since 1986, he has beaten the S&P 500 by more than 2% per year. He also has grown the assets under management to over $30 billion. In a recent 2013 Barron’s Roundtable, Mario Gabelli talked about several stocks that he felt confident about. Let’s look closer into his thesis to determine their attractiveness. In this article, we will look at Hillshire Brands Co (NYSE:HSH).
Hillshire is considered to be the leading meat-centric food solutions provider for foodservice and retail markets. The company is operating with three main business segments: Retail, Foodservice, and Australian Bakery. In the retail business, Hillshire markets packaged meat and frozen bakery products such as hot dogs, breakfast sausages, and breakfast sandwiches to retail customers in North America. The foodservice business sells meat and bakery products to restaurants, hospitals, and other institutions, while Australian Bakery sells frozen dessert, ice cream, and savory products mainly in Australia and New Zealand. The retail business generated 71% of the total revenue in fiscal year 2012, whereas the Foodservice segment ranked second, with 26% of the total revenue. The company’s biggest customer was Wal-Mart Stores, Inc. (NYSE:WMT), which accounted for 25% of net sales.
$35 – $50 range in two years
Mario Gabelli thought there was a high probability that Hillshire would be acquired. The company was estimated to generate $4.1 billion in revenue in the fiscal year ending June 30. The EPS would be around $1.60-$1.65, and in 2017 EPS could even increase by 45% to $2.40. Gabelli mentioned that Hillshire was the leader in all of its three business categories, including breakfast sausages, lunch meat, and hot dog. In addition, the company has kept reducing its debt level. As of September 2012, it had $311 million in total stockholders’ equity, $253 million in cash, and $942 million in long-term debt. To focus on its core meat business, Hillshire has recently announced it will sell 100% of its Australian Bakery business to McCain Foods for $85 million. At the current trading price of $30.50 per share, Hillshire’s total market capitalization is $3.73 billion. The market is valuing Hillshire at 19x forward earnings. If Hillshire could earn $2.40 per share as Gabelli estimated, the 15x P/E would translate into a $35 stock price. For 20x earnings, Hillshire might reach $48 in 2014. Thus, Gabelli said shares could reach $35 – $50 in around two years.
Most profitable with highest dividend yields
In comparison with its peers, including Hormel Foods Corporation (NYSE:HRL) and Tyson Foods, Inc. (NYSE:TSN), Hillshire is the smallest company. Hillshire, with 9,500 employees, has more than $3.7 billion in market capitalization. Hormel Foods has 19,700 employees and its market capitalization is $9.23 billion. Tyson, with 115,000 employees, is worth more than $8 billion in the market.
| HSH | HRL | TSN | |
| Operating margin (%) | 9 | 9 | 4 |
| ROIC (%) | 117.14 | 16.45 | 4.44 |
| D/E | 3 | 0.1 | 0.4 |
| EV/EBITDA | 7.94 | 10.36 | 5.35 |
Div yield (%) | 2.7 | 1.8 | 0.8 |
Among the three, Tyson has the lowest operating margin and return on invested capital. Hormel and Hillshire had the same operating margin of 9%. Hillshire enjoyed the extremely high return on invested capital, 117%, while the ROIC of Hormel and Tyson were 16.45% and 4.44%, respectively. Hillshire is also paying investors the highest dividend yield, at 2.7%. In terms of valuation, Hormel has the highest valuation at 10.36x EV/EBITDA. Tyson is the cheapest with a 5.35x EV/EBITDA, while Hillshire’s valuation stands in between at nearly 8x EV/EBITDA.
My Foolish Take
With the leading market position, high ROIC and dividend yield, Hillshire seems to be a good stock to hold for the long-term. I personally think that if Hillshire was acquired, the buyout price might value Hillshire at double digit EV multiples.
The article A Profitable and High Yielding Food Company originally appeared on Fool.com and is written by Anh HOANG.
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