There may be no direct link established between Maple Leaf Food Inc.’s (OTCPK:MLFNF) products and the growing number of listeria deaths, but the connection has been made in the minds of consumers with the company’s name now associated with a health risk. Maple Leaf says the direct costs will be in the range of C$20-million before taxes, or C$0.10 per share after tax, but the time and effort needed to rebuild consumer trust in the brand may prove to be far greater.
The collateral damage will likely extend beyond the products directly impacted by the recall, said RBC Capital Markets analyst Irene Nattel, telling clients that the brand rebuilding efforts have already begun. It will be difficult to quantify the longer-term collateral damage as consumers “purge their kitchens of any Maple Leaf branded products, and likely look distrustfully at packaged meats as a category,” she said, adding that the impact should moderate within 12 months.
Octagon Capital analyst Robert Gibson said he is being conservative in assuming Maple Leaf will lose all of its retirement home and hospital business. His 2009 earnings per share [EPS] estimate falls by a penny to C$0.71 as a result.
He also noted that when Pilgrim’s Pride Corp. (PPC) had a similar problem at one of its plants in 2002, the stock recovered quickly to about 80% of its previous value after dipping on the recall announcement.
Mr. Gibson believes the worst has been fully discounted in Maple Leaf shares and moved his recommendation back to a “buy” with a C$12.50 price target.
As a result of investor caution in the prepared meats category, Ms. Nattel trimmed her revenue and forecasts for Maple Leaf. This generated earnings per share (excluding items) reductions from C$0.30 to C$0.26 in 2008 and from C$0.55 to C$0.45 for 2009. She said net the cost of the recall, her 2008 EPS estimate is C$0.16. RBC rating is "sector perform" and its price target falls by C$1 to C$10.00 per share, which represents upside of 13.5% after Monday’s 10% sell-off.
Ms. Nattel said Maple Leaf has made a very good start in dealing with the crisis, acting quickly and openly.
The analyst added:
Reassuring the public with regard to recurrence prevention may prove more tricky, given the naturally occurring nature of the Listeria bacteria, but presumably MFI will step up its surveillance from the 3,000 swabs that were taken in 2007, along with educating consumers around food safety and food preparation.