Maple Leaf Foods (TSX:MFI) produces food products under various brands. It operates primarily in Canada, the United States, and Asia. It has segregated its businesses into three operating units, namely Prepared Foods, Poultry, and Pork, which contribute 55%, 20%, and 25%, respectively, to its top line.
Supported by its solid quarterly performances and improving operating efficiencies, the company’s stock price has increased by over 77% year-to-date. Meanwhile, let’s examine its recently reported second-quarter performance and growth prospects to determine buying opportunities in the stock.
MFI’s second-quarter performance
In the second quarter, MFI reported revenue of $1.36 billion, representing a 7.5% increase from the previous year’s quarter amid favourable pricing, improved mix, and volume growth. Meanwhile, the three operating units — Prepared Foods, Poultry, and Pork — reported revenue growth of 7.5%, 8.5%, and 10.7%, respectively. The improvement in channel mix, foodservice volume growth, and price increases drove the Poultry unit’s revenue. Increased processing of hogs and higher average weight of hogs boosted its revenue from the Pork segment.
Furthermore, its gross profits increased by 79.6%, while gross margins expanded by 690 basis points to 17.3%. The increase in the mark-to-market valuation of biological assets, favourable commodity futures contracts, improved pork market conditions, and volume growth in Prepared Foods and Poultry units, along with progress in operating efficiencies, led to the expansion of its gross margins.
Meanwhile, its operating income stood at $57.8 million. However, removing special items, its adjusted operating income stood at $122.8 million or $0.56/share, representing a 211.1% increase from the previous year’s quarter. Also, MFI generated $216 million of free cash flow during the quarter. The company also lowered its net debt by 28.2% to $1.344 billion, with its net debt to adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) falling to 2.1. It’s an improvement from 2.6 at the beginning of this year and 3.4 from the same time last year. Now, let’s look at its growth prospects.
MFI’s growth prospects
MFI expects the consumer environment to remain stable for the rest of this year. Additionally, the company plans to invest in the development of innovative products, as well as marketing and advertising, to boost consumer demand. It is also expanding its geographical reach in the United States and strengthening its supply chain, which could support its financial growth in the coming years.
The Mississauga-based company intends to spin off its pork business into a new entity, Canada Packers, as part of its strategy to unlock greater value for shareholders. Having already received shareholders’ approval, the company is hopeful of closing the deal by the end of this year. Amid these growth initiatives, the company’s management expects its topline to grow in the mid- to single-digit range this year. Its adjusted EBITDA could come between $680 million and $700 million, with the midpoint of the guidance representing a year-over-year increase of 8.8% from the previous year.
Investors’ takeaway
Although MFI has witnessed substantial buying over the last few months, it trades at an attractive valuation, with its NTM (next-12-month) price-to-sales and NTM price-to-earnings multiples at 0.8 and 16.8, respectively. Additionally, the company has raised its dividend at an annualized rate of 11.6% for the last 10 years, with its forward dividend yield at 2.73%. Considering all these factors, I believe MFI would be an excellent buy.
