Hillshire Brands New Coverage: $38 Trefis Price Estimate

| About: Hillshire Brands (HSH)

Hillshire Brands Company (NYSE:HSH) is a manufacturer and marketer of food products focused primarily on the meats-centric products for retail and foodservice markets. The company generates nearly $4 billion in annual sales and has approximately 9,500 employees. Hillshire Brands' portfolio includes brands such as Jimmy Dean, Ball Park, Hillshire Farm, State Fair, Sara Lee frozen bakery and Chef Pierre pies, as well as artisanal brands Aidells and Gallo Salame.

The company, formerly known as Sara Lee Corporation, began trading under the HSH ticker symbol on June 29, 2012, following the spin-off of their international coffee and tea business. It sells a variety of packaged meat products that include hot dogs, corn dogs, breakfast sausages, dinner sausages and deli meats, as well as a variety of frozen baked products. These products are sold through the retail channel to supermarkets, warehouse clubs and national chains in North America. The company also sells a variety of meat and bakery products to foodservice customers in North America.

On Dec. 18, 2012 the company announced that it had signed an agreement to sell 100% shares of its Australian subsidiary "Kitchens" of Sara Lee Pty Ltd. to a subsidiary of McCain Foods Limited for approximately $85 million. Earlier this year the company announced it had completed the sale of this division in an all cash transaction. As a result the remaining company will be focused on the two main divisions in North America: retail and foodservice.

We recently launched the coverage for Hillshire Brands with a $38 Trefis price estimate. Below are some of the key trends impacting the company’s valuations.

Popular Brands and Success of New Products Key to Future Growth

Hillshire Brands owns several of the leading brands in the packaged meats food segment. Key retail brands including Jimmy Dean (breakfast sausage), Hillshire Farm (meat and sausages) and Ball Park (hot dogs), are leading the company's growth. These three brands also occupy highest market shares in their respective product categories.

With increased marketing and promotional spends and new product launches, the company has plans to revive the brands that are struggling. Earlier this year the company announced expansion of its Jimmy Dean "Delights" with new flatbread sandwiches and Sara Lee premium meat products were enhanced for their health quotient. With a highly concentrated meat-centric approach of the company, we believe that the performance of its popular brands and the new products will be key to the company's future growth.

Higher Commodity Costs to Drag Earnings

Hillshire Brands' input commodity prices have experienced significant price volatility in the recent past. Despite efforts to offset commodity price increases with pricing and saving efforts, commodity costs increased significantly in 2011 over the prior year. This increase in commodity costs was only partially offset by approximately $468 million in pricing actions, with a 6% pricing increase in the North American retail and a 10% increase in the foodservice division. We expect commodity costs for the company to continue to be a drag on the company's earnings in 2013 as well.

Disclosure: No positions.