With Del Monte Foods' (NYSE: DLM ) stock rising 7% on Thursday, you might think that this purveyor of products ranging from StarKist tuna to pet food to canned tomatoes had a great quarter. No, not really. What the company did manage to do, though, was come in slightly above the target and not deliver any particularly bad news. When expectations get low enough and the overall market cooperates, that's all you need for a good day.
Sales rose a bit more than 4% in the quarter, but sales, general, and administrative costs grew at almost twice that rate. As a result, operating income slipped a bit, and the operating margin fell. By virtue of lower interest expense, though, the company was able to show growth in income from continuing operations -- albeit growth of just 2%.
Although I think the company may deserve some credit for new product initiatives, company management devoted a fair bit of time on the conference call to talking about something I find questionable -- growth through leveraging a health-and-wellness trend. Yes, the Food and Drug Administration recently revised its food pyramid and nutritional guidance, and everybody knows that we should all eat more fruits and vegetables. But does that mean that people are going to start loading up their carts with fruit cups instead of pudding cups? I wouldn't hold my breath.
But wait, you say. This is a food business -- it's supposed to be slow-growth. Yes, but the company's return on capital is in the single digits, along the lines of the equally unimpressive JMSmucker (NYSE: SJM ) and well below the likes of Unilever (NYSE: UL ) , Kellogg (NYSE: K ) , Heinz (NYSE: HNZ ) , and Campbell Soup (NYSE: CPB ) . To put a finer point on it, I just don't think all that much of the job that current management is doing.
The good news here is as it has been for a while -- strong brand value and good cash-flow generation. The company does have a fair bit of debt, but there should still be room for further share repurchases and/or a dividend. What's more, if the board would decide to shake things up a bit, it's entirely possible that the picture could get even brighter.
I'm always wary of calling any stock "safe" and particularly so when the return on invested capital is so low. Nevertheless, I think value hounds could scout this one out with the idea that even if the company doesn't make dramatic improvement, there's probably not a whole lot of risk in the story other than simply investing in a company that may go nowhere fast.
For more Foolish thought for food:
Unilever and Heinz are
Motley Fool Income Investor
recommendations.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
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