Drip
Portfolio Report
Tuesday, January 6, 1998
by Randy Befumo
([email protected])
ALEXANDRIA, VA (Jan. 6, 1998) -- Our last stop before going to the second round of the Branded Food Olympics is International Home Foods (NYSE: IHF), a recent initial public offering that does not yet have a dividend reinvestment plan (DRP), but is interesting on a comparative basis.
Description: In 1996, International Home Foods was sold by American Home Products (NYSE: AHP) to the leveraged buyout firm of Hicks, Furst, Tate and Muse in a leveraged recapitalization that had the company add debt and buy in equity. Part of the proceeds from the debt went to purchase Bumble Bee tuna, the main driver for the company's impressive year-over-year revenue growth. As the numbers looked good and branded food products are all the rage, Hicks, Furst sold the shares back to the public at a much higher price, getting the public to also take on the debt.
Major brands: Chef Boyardee pastas, PAM cooking spray, Bumble Bee tuna, Polaner fruit spreads, Gulden's mustards, Jiffy Pop popcorn, Crunch N' Munch snack treats, and Campfire marshmallows.
Valuation, Growth, and Share Performance: At $27 3/8 per share, International Home Foods' market cap is $2.2 billion (share price multiplied by 77.2 million shares outstanding). With annualized sales for this fiscal year of $1.1 billion, the company trades at 2.0 times sales (which is the market cap divided by the trailing sales).
International Home Foods has $63.7 million in cash and $931 million in long-term debt. The enterprise value of International Home Foods (enterprise value was described in our Dec. 4 report) is closer to $3.1 billion -- a pretty big difference. The enterprise value-to-sales ratio is 2.8, fairly pricey.
On the earnings per share side, International Home Foods trades at 49.6 times its annualized earnings per share. The stock trades at 35.8 times this year's earnings estimates and 25.7 times fiscal 1998 estimates. As the company aggressively pays down debt to reduce interest costs, earnings growth should mushroom. However, given that much of the growth over the past few months has come because of an acquisition, the numbers here may be a bit optimistic.
Margins Reviewed: For the last twelve months, International Home Foods had $1.1 billion in annualized sales and $121.4 million in annualized operating income, giving operating margins of 11.2%. This is a little lower than average for the branded food group and is the result of the incredible amount of money the company dedicates to interest. About 8.9% of revenues are consumed by interest payments. The next highest company in our survey is Nabisco (NYSE: NA), and it only puts 3.7% of its revenues into serving its debt. Put another way, International Home Foods would almost double its earnings if it were to get rid of its debt.
Leverage reviewed: With $931 million in long-term debt and $1.1 billion in sales, International Home Foods has an 86% debt-to-sales ratio. Again, Nabisco is the only other company to come close. International Home Foods is leveraged to the hilt and would get a nasty surprise should sales come in below projections.
Capital allocation: The company's relatively short history under current management leaves little information to judge by, although it does not pay a dividend and has not had the opportunity to buy back shares.
The Snapshot for International Home Foods:
Ticker: IHF
Recent Price: $27 3/8
Trailing 12-month sales: $1.1 billion
Trailing 12-month oper. earnings: $121.4 million
Operating Margins: 11.2%
Trailing 12-month EPS: $0.57
Fiscal '97 EPS estimates: $0.79
Fiscal '98 EPS estimates: $1.10
Enterprise value to sales: 2.2
Current P/E: 49.6
P/E on 1998 EPS: 35.8
P/E on 1999 EPS: 25.7
Yield: 0.0%
Conclusion: Just in case you were confused, International Home Foods is a poster child for what a branded food company should not look like. The consistent earnings stream allows for branded food companies to carry more debt than the average company. However, in this case it appears excessive and creates a higher risk of potential problems. Add to this the fact that the company trades at a premium valuation and you can see why sidestepping IPOs and focusing on DRPs might be a good thing for the average investor.
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