Somebody wake me when Del Monte Foods (NYSE:DLM) gets interesting again. I see some real cash flow potential with this company, but waiting for real growth feels to me like waiting for Godot.
For the company's fiscal first quarter, sales rose slightly more than 7%. Growth was fairly even across both the consumer and pet-products divisions, with the former growing the top line by nearly 7% and the latter increasing by nearly 9%. Margins also improved a bit for the quarter, and operating income increased by 17%.
Let's keep the performance in context, though. Operating income for the quarter was still about 8% below the level achieved two years ago. Likewise, while the reported 40% improvement in operating income within the pet business is heartening, the company remains roughly 13% lower than it was two years ago in that segment.
Del Monte's cash flow is something of a mixed bag. The company has produced about $200 million in free cash flow for each of the past two years, and management apparently expects a similar amount for fiscal 2006. Now, close to a buck per share in free cash flow is pretty good, particularly when the stock trades for about $11. But that amount has held steady for three years running. Where's the growth?
I'm a big believer in using return on equity to evaluate companies and managements, and Del Monte Foods doesn't score well on that standard. Annualizing first quarter results, you get a return on equity of about 5.6%. Despite a fairly high debt-equity level (which inflates return on equity), Del Monte Foods scores far below the likes of Ralcorp (NYSE:RAH), ConAgra (NYSE:CAG), General Mills (NYSE:GIS), McCormick (NYSE:MKC), and, frankly, most other food companies.
Are things getting better at Del Monte Foods? Maybe. The company has said the right things about repositioning brands and working to improve profitability. But it's clear that management has a long way to go.
The good news? I think Del Monte Foods is stable enough, particularly on a cash flow basis, to ultimately turn around and produce cash flow growth. The bad news? It may take a while, and since the company pays no dividend, investors will get nothing in the interim. Still, for value-focused investors who can wait it out, Del Monte Foods might be worth a bit of due diligence.
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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).
