So, it looks like dull-as-dishwater Del Monte Foods
But before we go there, let's look back at the quarter that was. Sales were up 2%, operating income was flat, and income from continuing operations was up about 7%. Sad to say, that's pretty good performance for this company.
The bigger news, though, is the asset purchase and sales announced with the earnings. There had been rumors for a while that the company was looking to sell the soup and infant businesses and those proved to be true -- Del Monte Foods will be selling them to TreeHouseFoods
And with that cash hot in their hands, management is turning around and buying the Meow Mix cat food business from a private equity group for $705 million. With the Meow Mix business having produced about $250 million in revenue last year, that price is about 2.8 times sales. Now, I realize price-to-sales isn't great as a means of valuation and there aren't any pure-play pet food companies to compare it to, but that multiple seems rich compared to the packaged food industry in general.
On one hand, the deal makes a lot of sense. After all, the pet products business seems to be the part of Del Monte Foods that management is actually doing a good job running, so you could look at it as augmenting a strength. It's also true that the pet food business is somewhat fragmented and that this deal might make the company a better competitor relative to the likes of Nestle
Then again, this is a company with a historically poor record of returns on invested capital. And when you see a group of people unable to earn satisfactory returns on a given pool of capital, does it make sense to increase that pool of capital?
I'll try to be optimistic here. After all, this company produces quite a bit of free cash flow, so as long as that cash generation ability isn't damaged, there should be some support here. I can appreciate the appeal here for value hounds, but I'd keep a careful eye on the business, lest you end up eating cat food yourself.
For more Foolish food for thought:
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).