Maple Leaf Shares Fall on Expanded Recall

| About: Maple Leaf (MLFNF)

Shares of Maple Leaf Foods Inc. (OTCPK:MLFNF) fell as much as 12% on Monday morning after test results from Health Canada over the weekend established a link between meat products recalled by the company and a listeria outbreak that has been linked to at least four deaths. Despite the sell-off that follows a 10% decline last week after the first product recall was announced on August 17, some analysts are suggesting that this is not another Menu Foods.

They are referring to Ontario-based Menu Foods Income Fund’s tainted pet-food scandal, which brings up bad memories for consumers and investors alike who were affected by the debacle that led to cat and dog deaths and sicknesses revealed in March, 2007.

Octagon Capital analyst Robert Gibson told clients:

For a number of reasons, we believe the situation is different. First of all, food borne illnesses are an everyday risk that producers must watch for and, as such, customers may be more understanding. Secondly, Maple Leaf can supply its customers from other facilities, so customers do not need to turn to a competitor.

He said the C$20-million in direct costs, before taxes, associated with the recall expected by Maple Leaf, works out to roughly C$0.10 per share and cut his 2008 earnings estimate to a loss of C$0.19 per share from a loss of C$0.09 as a result.

However, there is a far greater risk associated with public reaction, Mr. Gibson warned, noting the relatively positive media response to date. "Will consumers react the same way? It’s too early to tell," he said, adding that Maple Leaf did take action before Health Canada concluded that any cases of listeriosis could be directly attributed to its products. "This may serve the company well in the eyes of customers," he said.

The company said the costs are linked to reimbursements for returns, factory clean-up and other expenses and will be reflected in its fiscal third quarter ended September 2008. However, it warned that the figure is subject to change based on the actual amount of product returned by customers, costs associated with increased advertising and the possibility of reduced sales that it cannot yet estimate.

On a conference call with analysts, Maple Leaf chief financial officer Michael Vels said the costs will be reflected in the company's third quarter results for the period ended September 2008, but was unable to shed any light on possible legal costs.

He said:

The short-term financial impact of this action is secondary to our responsibility to safeguard our consumers' health.

He promised to update investors on the financial effect of the recall as its results are released.

Mr. Vels said the actual amount of product recalled contributes a relatively small amount in terms of sales when compared to the company's 23 other facilities. He also said the potential impact on advertising spending would likely be a "relatively smaller part of the ongoing financial effect," but there are no marketing plans yet.

On Saturday, Maple Leaf expanded its product recall to include all production from its plant in Toronto, where sanitization work is expected to be completed as early as today with a plant re-start.

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Tagged: , Food - Major Diversified, Canada
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