Nobody Doesn't Like Sara Lee - Except Wall Street

The Street has been in a loathing mood regarding Sara Lee (SLE), punishing its shares down to levels not seen in almost 12 years. This major branded food processor with such famous brands as Ball Park, Douwe Egbert's, Hillshire Farms and Jimmy Dean has seen its shares breakdown to unwarranted levels, posing a superb buying opportunity.

Third Quarter earnings were strong: SLE produced better than expected results producing a 10% increase in revenues ($3.2 billion vs $2.9 billion) that enabled operating earnings to increase 61% to $242 million. The company's jump in earnings was impressive especially when you factor in the recent spike in commodity prices that have hampered the entire sector (gross margin decreased only 50 basis points to 39%). SLE benefited from a 160 basis point drop in SG&A costs to 31.4% as well as fewer shares outstanding.

The Analyst's take: Recent analyst action has been mixed. Both Wachovia and DA Davidson each raised their opinions to buy ratings, while JP Morgan cut its view from overweight to neutral. Consensus earnings estimates for 2008 are .98 representing a forward PE just below 13 and a 8% increase to $1.06 for Fiscal 2009. The analyst's average one year share price target is $16.75

The numbers: The company's top line is notable exceeding $13 billion. Its price to sales ratio is a bargain .65. SLE has a nice cash stockpile of $1.26 billion but has accumulated too much debt, nearing the $3.4 billion mark. Its dividend payout yields a respectable 3.5% and its shares are selling at about 2.5 times book value.

Hidden real estate value: SLE's 10K states that it owns most of the 300 processing and distribution centers it operates worldwide, encompassing 27.1 million total square feet. It is logical to deduct that these real estate holdings have increased significantly since the properties were originally acquired , and that the balance sheet does not accurately reflect this appreciation.

Mutual Funds are loading up: Barclays Global Fund, ValueAct Capital and Brandes Investment Management have been gradually increasing their stakes and now together own over 20% of the outstanding shares. The company has an aggressive share repurchase plan in effect with 25 million shares still remaining for purchase.

Takeover target: Both Heinz (HNZ) and Kraft (KFT) could have SLE in their crosshairs as a potential acquisition target since its market cap of only $8.8 billion is relatively low and prospective synergies achieved could be substantial.

Insider buying: James Crown, a director, recently purchased 1,055,000 shares at $12.94 per share. This rather substantial $13 million commitment shows that this insider is indeed putting his money where his mouth is.

The Bottom Line: The shares offer more reward than risk. Wall Street doesn't like Sara Lee, but I do. I am eager to play the contrarian game and buy unpopular stocks, how else are you supposed to buy low and ultimately sell high?

Comments

[shoots andladders]

Any disclosures??? Do you own the stock?

[User 221225]

Is this article about Sara Lee (SLE) or ConAgra (CAG)?

[writermark]

sorry about the typo's..the article is about SLE...

[writermark]

I'm long on this one

[JLH]

I'm short.

[User 242928]

I agree.