ALEXANDRIA, VA (Jan. 5, 1998) -- Today we take a look at Sara Lee, the second-to-last company we will be covering in our food odyssey.
Description: Sara Lee (NYSE: SLE) recently has made a string of restructuring decisions aimed at focusing on brands, improving the bottom line, and increasing shareholder value. The global purveyor of pound cake and L'eggs pantyhose has decided to divest itself of its textile operations to focus solely on marketing and selling its products. One could argue that Sara Lee's late entry into the restructuring craze is more a product of disgruntled shareholders than of Sara Lee's genuine desire to transform itself, but in the end it will be the results that matter more than the rationale behind those results. Sara Lee shares exploded for an almost $10 gain the week it announced the move and continued to climb afterwards, turning what would have been a mediocre year into a period of high performance for Sara Lee stock. Major brands: Ball Park franks, Hillshire Farms and Jimmy Dean sausages, Pickwick tea, Douwe Egberts coffee, various baked goods under the Sara Lee brand, Endust furniture polish, Kiwi shoe polish, Playtex, Bali, Wonderbra and Hanes underwear.
Financials: Because this is an overview, we'll only look at a few key things: How is the company priced relative to sales, earnings per share, and the expected growth rate (valuation)? What are the current operating and net margins (margins)? How much long-term debt does the company have (leverage)? And what does management do with the cash that it generates (capital allocation)?
Valuation and Growth: At $57 1/16 per share, Sara Lee's market cap is $28.5 billion (share price multiplied by 502 million shares outstanding). With annualized sales for this fiscal year of $19.7 billion, the company trades at 1.44 times sales (which is the market cap divided by the trailing sales).
Sara Lee has $173 million in cash and $2.2 billion in long-term debt. The enterprise value of Sara Lee (enterprise value was described in our Dec. 4 report) is closer to $30.5 billion, and that value in relation to sales is 1.6. This 1.6 is below average for the food companies we have looked at. Sara Lee's long-term debt is pretty much in line with the level of debt at the other food companies.
Sara Lee trades at 27.3 times its annualized earnings per share. The stock trades at 25.1 times this year's earnings estimates and 22.0 times fiscal 1998 estimates. These estimates could prove to be low if, in fact, Sara Lee aggressively restructures. When Campbell Soup restructured and pruned its weaker brands, operating margins shot up to 19.0%, almost twice those Sara Lee currently enjoys.
Margins Reviewed: Again, operating earnings divided by revenue gives us the operating margins. This number shows what the company is earning after the cost of the product and all the costs of running the business are subtracted. It indicates how efficient management is at running the business "operations" -- hence, operating margins.
For the last twelve months, Sara Lee had $19.7 billion in annualized sales and $1.7 billion in annualized operating income, giving operating margins of 8.4%. Although on the low side, the potential for increased operating margins due to the restructuring is very real. The earnings estimates do not currently seem to assume much margin improvement or any benefits from share repurchases.
Leverage reviewed: With $2.2 billion in long-term debt and $19.7 billion in sales, Sara Lee has a 11.1% debt-to-sales ratio. This is pretty low.
Capital allocation: The Sara Lee dividend is 1.62%, which is about average for an S&P 500 company. The company has also started to get aggressive on the share repurchase front.
The Snapshot for Sara Lee:
Recent Price: $57 1/16
Annualized 12-month sales: $19.7 billion
Annualized 12-month oper. earnings: $1.76 billion
Operating Margins: 8.4%
Annualized 12-month EPS: $2.08
Fiscal '97 EPS estimates: $2.26
Fiscal '98 EPS estimates: $2.58
Enterprise value to sales: 1.6
Current P/E: 27.3
P/E on 1998 EPS: 25.1
P/E on 1999 EPS: 22.0
Conclusion: To really see potential in Sara Lee, you have to be a believer in the restructuring and the benefits that will accrue as a result. However, at only 1.6 times sales it does not appear that the current valuation assumes more than moderate benefits, leaving some room for upside. If we were to look at Sara Lee further, it would be premised on assumptions about what it can do post-restructuring, not based on its current valuation. As we are loathe to get too aggressive when forecasting future profitability, this means Sara Lee will probably not make the cut.