By all accounts, this week has been an absolute nightmare for Canadian food giant, Maple Leaf Foods (TSX: MFI). Actually, if I’m being honest, the last almost five years have been ones to forget as an investor, with the stock price now at the same level it was in June of 2015.
As one of the only true diversified Canadian food stocks, its place has been typically guaranteed in any well-diversified, all-weather portfolio, but investors are starting to get fatigued, and this week’s earnings announcement led to a complete shareholder capitulation, with the stock price going from $30 to $23, representing a decimation of almost a quarter of the market capitalization.
I know a lot of retirees who hold this stock in their portfolio for its relative stability and a small but secure dividend yield of 2%. The stock never goes up by much, but it doesn’t go down by much either, and this recent earnings shock has led to a stampede out of the stock. But I smell a bit of an opportunity here, and I will let you sit back and get comfortable while I explain.
One bad quarter does not a decade make
Maple Leaf is not a growth stock by any stretch of the imagination, but the company has been smart enough to make a lot of strategic investments to set itself up for the long term. If you step back and look through the noise of the big earnings miss, there was actually some good stuff that happened last quarter that just got lost in the shuffle.
First, no one seems to care about the fact that the company grew its “top-line” number significantly. Revenue for the quarter came in at $996 million, which was 14% greater than $875 million in the same quarter of last year.
The year-to-date revenue for 2019 clocked in at $2,926 million, almost 13% higher than the $2,602 million at the same point last year. This is a very important metric in the context of their terrible quarter because it proves that the company is not facing an existentialist crisis.
If the company had flat to declining sales, that would be a completely different problem, because it would signal that its products do not resonate with the marketplace.
Where the company really struggled is an extra almost $50 million in expenses for the first nine months of 2019 relative to the previous year, primarily driven by the evolution of the company’s plant protein strategy to drive sales and secure market share in a rapidly growing global segment.
In support of the plant strategy, significant investments in advertising, promotion, and marketing were made, which are critical to enhancing brand awareness and supporting new plant-based product launches.
Food tastes are evolving fast
Packaged food companies have never been this much out of favour, and investors only need to take lessons from the recent Kraft-Heinz debacle. It turns out that consumers are sick of overpacked and overprocessed goop that masquerades as nutritious and healthy food.
Consumers want fresh, healthy, and nutritious meals that are not loaded with trans-fat, salt, and sugar, and a lot of companies, including Maple Leaf Foods, have taken a bit of time to grasp this evolving reality. It feels like consumer preferences have changed overnight but Maple Leaf Foods’s plant protein scaling shows that the company isn’t sitting still.
In addition, the company has transitioned the Maple Leaf Prime meat brand to be 100% raised without antibiotics and has removed everything artificial in the ingredients. All this points to a company that has a lot of fight left in it and feels like it can carve out a big share of the North American food market for the long term.
Foolish bottom line
I am not going to sugar coat this one. The share price has been a disaster, and even at $23, the stock price decline may not be quite done yet. Investors are most likely looking to rotate out of this stock for now until the company has a couple of good quarters under its belt. That may put the shares under more pressure in the next few weeks, but it feels like the downside is limited here.
Smart investors should pay very close attention at these prices and start cautiously nibbling at shares around the $20-$22 range for a bumper 2020 return on this investment.
