With Del Monte Foods'
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
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).