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Bringing Home the Bacon – Maple Leaf Foods (MFI)

This post was delivered to readers of The Stock Analysis Waiting List on August 25, 2016.
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My investing approach is fairly simple; I want to buy good companies, with great products, that have solid leadership, margins that matter, increasing profitability and sustainable growth.  I want them to be predictable, transparent, accountable and sensible.  I like no (or negligible) debt, strong brands, controlled expenses and an incentive to hold (dividends).  I like stocks on sale, companies I can teach a 10 year old about and can turn customers into clients.  A competitive advantage is nice, but really I want a company that can focus on doing what they do best.

I’ve rarely found a company that exhibits all of these traits, but frequently I will find a company that has a few or many and this catches my interest and starts my research process. For every 10 stocks I initiate research on almost 9 of them are quickly thrown away.  Most of these have too much debt, poor margins, doing too many things, have no profitability or suspect management.

I will find the odd company to place on a watchlist while I complete level II or level III research, I’ll develop a target price and set some soft metrics for future quarterly reports to compare performance against.

Even more rarely I’ll come back across a company that I’ve thrown to the trash pile before, but a value stimulus has been created that catches my attention.

Recently that was Maple Leaf Foods (MFI).

Maple Leaf Foods was a company I looked hard at back in 2008 during its listeria outbreak after it had dropped ~50% at the time I examined it. I never kept my note, but I remember specifically looking at its capital assets, margins and product line.  Having owned a number of consumer product companies over the years I have become very comfortable at looking for a pattern of successful traits.  Unfortunately their assets were old, efficiency was low, margins were not impressive and the product line was far too broad lacking a clear and core focus.  So I walked away.

Between 2012 and 2015 I had noticed the stock had doubled from its low of $8 but I was still skeptical of leadership and their ability to execute. Remember that it’s not easy to implement a strategic plan without significant setbacks. Shedding non-core assets and improving operating facilities were nice, but the margins still lagged considerably in my opinion.

Q2 results this July finally caught my attention; improvement in margins, quite considerably, and sales. Now was the time to conduct another situational analysis, a comparison to industry peers and look back at their strategic plan to gauge where they were presently and how they measured today against their plan.

The company now has virtually no debt, a focused group of core brands and have an ability to increase margins further helping to increase their profitability. These are the foundations of what has always allowed companies such as Hormel Foods, Saputo and formerly General Mills to thrive and lead to success in my portfolio.

Maple Leaf Foods could start a period of strategic acquisitions, be acquired themselves or start directing their extra cashflow to a higher dividends or share buybacks.

My interest here is not to sell the stock and convince readers they should invest also. I’m interested in demonstrating an example of the process I go through for selecting my stocks.  I’ve no doubt missed all the gains since the stock was at $8 back in 2008, but to be honest I wouldn’t have been comfortable with an investment at that time for the reasons stated above.  This company wouldn’t have fit my allocation of capital strategy and for every stock that does turn things around another three fail, stumble or become laggards.  And I’m not suggesting that MFI has turned it around completely and will now flourish like Hormel, General Mills or Saputo.

What I’m highlighting is that MFI is in a situation where I am now comfortable committing capital, albeit a small portion of my portfolio and an exploratory position at best, and monitoring their execution for the next few quarters. I’ve done this successfully in a few others stocks and in other situations I’ve sold back out of my position after a few quarters because of a failure to continue executing.  I have cash on hand to commit quickly to a full position, but in these situations I like to take a measured and disciplined approach by purchasing in 3 or 4 segments over a 6-12 month period.

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