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By Dave Marino-Nachison (TMF Braden)
March 1, 2001

American Italian Pasta Co.

Ticker: (NYSE: PLB)
Phone: (816) 584-5000
Website: http://www.pastalabella.com/
Price (2/28/01): $33.86

How Did It Double?

You say "comfort food" and I'll tell you about Gramma Kathy's spaghetti and meatballs, served from a cracked yellow bowl in a fourth-floor Woodhaven, N.Y., apartment. Say "comfort stock" and, for many folks, they'll likely think of American Italian Pasta Co. (NYSE: PLB), shares of which have doubled in the past six months as investors have taken their money out of technology shares in favor of safer havens.

American Italian Pasta (AIPC) was highlighted as one of the top 200 Small Companies -- it was #171, but who's counting? -- by Forbes Magazine last year. A look at the company's fiscal first-quarter report highlights reasons investors might be interested in this company as a hedge against ventures with less-certain business prospects, as AIPC not only turned in solid operational performance but made a strategic acquisition that should help down the road.

Business Description

AIPC is a leading producer of pasta. Just pasta, more than 80 kinds. Its pastas turn up everywhere, in the form of institutional foods, private-label supermarket products, ingredients in the pasta meals of other companies, and branded pasta distributed by other companies. (That's just a partial list.) Most of its business is retail (about 70%), the balance institutional.

If you're really lucky, you've had their angel hair pasta tossed in chili oil with lobster, peppers and shiitake mushrooms.

Financial Facts

Income Statement 
12-month sales:         $256.1 million 
12-month income:         $28.0 million*
12-month EPS:             $1.55*
Profit Margin:            10.9%
Market Cap:             $592.6 million 
(*before acquisition expenses)

Balance Sheet  
Cash:                     $7.6 million
Current Assets:          $71.6 million
Total Assets:           $439.5 million
Current Liabilities:     $32.3 million 
Long-term Debt          $161.6 million
Total Liabilities:      $219.5 million

Ratios
Price-to-earnings:        21.2
Price-to-sales:   2.3

How Could You Have Found This Double?

Though not a huge company -- its market cap is currently below $600 million -- AIPC has performed steadily, growing earnings and revenues at solid rates in recent years. Return on equity and return on assets have improved consistently as well.

But the company has had two strikes against it, especially over the last year during which it began to underperform the S&P 500. First, it's not in a super-high growth industry. Second, it competes in a sector dominated not by larger pure-plays but huge food conglomerates. Even those companies are only lately beginning to return to favor as investors look for defensive plays and attention turns back to the likes of Kraft -- a division of Philip Morris (NYSE: MO) -- and others. (For more on this sector, visit our InDepth: Consumer Brands area.)

Consumer staples tend to fare well in times of economic trouble, though they may not be the sort of investments to get the blood running hot. And pasta is certainly a staple, with some industry figures suggesting that the overwhelming majority of Americans eats it at least once a week -- a goodly portion of them eating it three times a week or more. Add to the equation a well-run company with a temporarily out-of-favor stock, and you can just smell the oregano... um, opportunity.

Where to From Here?

Probably the biggest story for AIPC now is its integration of Mueller's branded pasta business, which it bought from Bestfoods in November. (Bestfoods is now owned by Unilever (NYSE: UN), the European consumer goods giant.) AIPC paid $38.2 million, consisting of $17.6 million in cash and 686,666 shares of company stock valued at $30 per share -- it will pay the difference for any shares sold by Bestfoods for less, if necessary -- for Mueller's.

There were a couple of interesting details from the deal that investors should note. First, AIPC made pasta for Mueller's when it was owned by Bestfoods, and that deal forbade AIPC from making its pasta for other companies' brands. Now that it owns Mueller's, AIPC can start looking for further partnerships with other distributors.

The deal also mandated that Bestfoods give AIPC certain "transition services," while AIPC will honor Bestfoods' marketing agreements through April. The idea here is to preserve the value of the Mueller's operation -- as well as the brand -- while the reins are passed. In its 10-K report, filed in December, AIPC said "any major strategic changes [resulting from the acquisition] to the business will not occur until the second half of our fiscal year 2001."

Picking up a strong brand is good news for AIPC, which needs topline growth to enjoy the scale benefits helped by its well-run operations. It also may provide a platform for new, higher-margin opportunities to develop packaged products not unlike the convenience meals sold by companies AIPC currently supplies.

Then again, during a prolonged economic slowdown shoppers may be more likely to use pasta as a hearty, low-cost "stretcher" of meats and vegetables than as a platform for quick-serve or gourmet cooking. With a new Italian plant now online, the company now has the ability to market more effectively to European consumers and the increased manufacturing capacity to make future growth possible. AIPC seems well-positioned if it can continue to provide its broad customer base with quality products at good prices.

Dave Marino-Nachison loves pasta, despite all those naughty carbohydrates. He does not, however, own stock in any of the companies mentioned in this story. His stock holdings can be viewed online, as can the Fool's disclosure policy.

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