Fruit and veggie canner Del Monte (NYSE:DLM) puts the lid on its fiscal year 2006 tomorrow morning. Want to know what Wall Street expects to see? Read on. Want to know what really matters? Read on a bit more.

What analysts say:

  • Buy, sell, or waffle? Twelve analysts follow Del Monte, with five of them urging a buy, five more a hold, and two a sell.
  • Revenues. Analysts expect Del Monte to report just 1% better sales in its fiscal Q4 2006 than it did one year ago.
  • Earnings. Profits are predicted to slide 13% to $0.20 per share.

What management says:
If you're like me, when you think "Del Monte," you think fruits and veggies. But as detailed in a recent 8-K filing with the SEC -- and as explained by fellow Fool Stephen Simpson in a pair of columns on the subject -- the company's been making a big move into pet food in recent months.

In May, Del Monte announced that it completed its acquisition of privately held Meow Mix. Its purchase of Milk-Bone from former parent company Kraft (NYSE:KFT) is due to wrap up next month. Together, CEO Richard Wolford said the acquisitions will build Del Monte into a billion-dollar-per-year pet-food business. Left unsaid was that the bigger Del Monte gets in this space, the more clout it should have in negotiating higher prices with retailers like Wal-Mart and Target.

What management does:
Del Monte could use the help. Its gross and operating margins have both been trending downward over the last 18 months. And while you'll notice that in the chart below, the net margins are moving upwards, that's due less to improving fundamentals, and more to the fact that the rolling margins shown here incorporate the effects of a sizeable restructuring charge incurred in the May 2005 quarter; the farther we get from that hit, the more the net margins will continue to rebound -- but don't be fooled into thinking that this means operating results are improving.

Margins %

10/04

1/05

5/05

7/05

10/05

1/06

Gross

26.6

26.4

25.5

25.6

25.6

25.7

Op.

12.9

12.3

11.2

11.0

10.7

10.5

Net

5.0

4.8

3.7

3.9

3.9

4.0
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Generally, there are two main ways that management can improve a company's margins. It can grow revenues faster than its costs increase, allowing more dollars to slip from the top line down to the bottom unmolested; or it can control or reduce costs that siphon away existing revenues. So far, Del Monte has been unable to do either. Revenue growth has been anemic, rising just 3% year over year in the last six-month period. And operating costs are soaring, up 10% in the same period.

As we've heard countless times and from countless companies over the last year, Del Monte, too, blames "higher oil and natural gas prices. including transportation, packaging and raw product" for its higher operating costs. With energy prices still near historic highs, therefore, Del Monte will likely find it has limited ability to contain its costs growth. In fact, the company said as much in its last quarterly report, predicting that tomorrow's results will show that "energy, logistics, and other transportation-related costs, as well as steel, packaging, and fish costs, will continue to be higher than the prior year."

As for growing revenues to cover the higher costs, the company is raising prices to try to cover the difference, but so far its success has been only partial. Tomorrow, Del Monte will be able to add new revenues with the Meow Mix lines. But with the company predicting that this acquisition won't be accretive to earnings until 2008, this revenue stream, too, seems fated to suffer from the operating costs that have been holding the rest of the operation back.

Competitors:

  • Campbell Soup (NYSE:CPB)
  • Colgate-Palmolive (NYSE:CL)
  • ConAgra (NYSE:CAG)
  • General Mills (NYSE:GIS)
  • Heinz (NYSE:HNZ)

For more detail on Del Monte's push into the pet food sector, read Stephen Simpson's write-ups:

Colgate-Palmolive is an Inside Value recommendation. Heinz and Kraft are Income Investor recommendations. Take your favorite Foolish investing service for a free, 30-day trial run.

Fool contributor Rich Smith has no financial interest, short or long, in any company named above.